As filed with the Securities and Exchange Commission on April 24 , 2008
Registration No. 333-131605


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549

Post-effective Amendment No. 6 to
 
FORM S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 
SCI ENGINEERED MATERIALS, INC.
(Exact name of registrant as specified in its charter)
 
Ohio
2899
31-1210318
(State or other jurisdiction of incorporation or organization)
(Primary standard industrial classification number)
(IRS employer
identification number)

2839 Charter Street
Columbus, Ohio 43228
(614) 486-0261
(Address and telephone number of principal executive offices)

2839 Charter Street
Columbus, Ohio 43228
(Address of principal place of business)

Daniel Rooney, Chief Executive Officer
SCI Engineered Materials, Inc.
2839 Charter Street
Columbus, Ohio 43228
(614) 486-0261
(Name, address and telephone number of agent for service)


Copies to:

Michael A. Smith, Esq.
Carlile Patchen & Murphy LLP
366 E. Broad Street
Columbus, Ohio 43215
Telephone No. (614) 628-0798
Telecopier No. (614) 221-0216
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: þ
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “larged accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer ¨
Accelerated filer ¨
   
Non-Accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company þ

 
 

 
 
PROSPECTUS
 
SCI ENGINEERED MATERIALS, INC.
 
2,281,253 Shares of Common Stock
 
This prospectus relates to the sale of up to 2,281,253 shares of our common stock by persons who have purchased shares of our common stock or who may purchase shares of our common stock through the exercise of warrants as more fully described herein. The aforementioned persons are sometimes referred to in this prospectus as the Selling Shareholders. The prices at which the Selling Shareholders may sell the shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive proceeds from the sale of our shares by the Selling Shareholders.
 
We have amended our original prospectus to incorporate financial information for the   year ended December 31, 2007.
 
Our common stock is quoted on the Over-The-Counter Bulletin Board under the symbol SCCI. On March 20, 2008, the last reported sale price for our common stock as reported on the Over-The-Counter Bulletin Board was $ 3.20 per share.
 
The mailing address for the Company’s principal executive offices is 2839 Charter Street, Columbus, Ohio 43228. The phone number for Company’s principal executive offices is (614) 486-0261.
 

 
Each selling shareholder may be considered an “underwriter” within the meaning of the Securities Act of 1933, as amended.
 
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER THE RISK FACTORS BEGINNING ON PAGE 3 BEFORE PURCHASING OUR COMMON STOCK.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 

 


The date of this prospectus is April 24, 2008


Table of Contents
 

 
Prospectus Summary
  
1-2
     
Risk Factors
 
3-5
     
Use Of Proceeds
 
5
     
Cautionary Note Regarding Forward-Looking Statements
 
6
     
Selling Shareholders
 
7-9
     
Plan of Distribution
 
9-11
     
Our Management
 
11-15
     
Security Ownership of Certain Beneficial Owners And Management
 
15-16
     
Description of Securities
 
16-18
     
Interest of Named Experts and Counsel
 
18
     
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
 
18-20
     
Description of Business
 
20-25
     
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
2 5-29
     
Description of Property
 
29
     
Certain Relationships and Related Transactions
 
29-31
     
Market for Common Equity and Related Shareholder Matters
 
3 1
     
Executive Compensation
 
3 2
     
Equity Compensation Plan Information
 
38
     
Legal Opinion
 
38
     
Experts
 
38
     
Index to Financial Statements
 
F-1

Unless otherwise specified, the information in this prospectus is set forth as of March 31, 2008 , and we anticipate that changes in our affairs will occur after such date. We have not authorized any person to give any information or to make any representations, other than as contained in this prospectus, in connection with the offer contained in this prospectus. If any person gives you any information or makes representations in connection with this offer, do not rely on it as information we have authorized. This prospectus is not an offer to sell our common stock in any state or other jurisdiction to any person to whom it is unlawful to make such offer.



PROSPECTUS SUMMARY
 
The following summary highlights selected information from this prospectus and may not contain all the information that is important to you. To understand our business and this offering fully, you should read this entire prospectus carefully, including the financial statements and the related notes beginning on page F-1. When we refer in this prospectus to the “company,” “we,” “us,” and “our,” we mean SCI Engineered Materials, Inc., an Ohio corporation. This prospectus contains forward-looking statements and information relating to SCI Engineered Materials, Inc. See Cautionary Note Regarding Forward Looking Statements on page 6.
 
Our Company
 
Our company was incorporated on May 29, 1987, to develop, manufacture and market products based on or incorporating high temperature superconductive (“HTS”) materials. HTS materials are complex metal oxides – ceramics of certain stoichiometries (chemical mixture ratios), which exhibit superconducting phenomena when cooled to at least –196(degrees) Centigrade.
 
We recently amended our Articles of Incorporation to SCI Engineered Materials, Inc. from Superconductive Components, Inc. which is the name that we have used for business purposes for several years. We control the manufacturing process and measure performance in terms of sales, in two categories, Ceramics and Metals, as the products sold are easily separable into these categories. The performance measurements made in these two categories are, however, not conducive to segment reporting as there are many shared operating expenses relating to the production of both Ceramic and Metals that cannot be attributed solely to one or the other.
 
We view our business as supplying ceramic and metal materials to a variety of industrial applications including: Semiconductor, Photonics/Optical, Solar and Thin Film Batteries. The production and sale of High Temperature Superconducting (HTS) materials was the initial focus of our operations and these materials continue to be a part of our development efforts. We continue to seek funded research to develop new and improved products for future applications of HTS Materials.
 
Optical/Photonics currently represents the largest market for our materials. Our customers are device manufacturers who are regularly identifying new materials that improve the utility of optical/photonics coating. This includes materials that improve the ability of optical/photonics coatings to focus or filter light, and coatings that improve wear and chemical attack resistance, all of which increases the potential demand for the types and amounts of materials that we sell in this market. Photonic applications continue to expand as new methods are found to manipulate light waves to enhance the various properties of light the device manufacturers are seeking. During late 2007, we added a sales engineer to focus on the expanding demand for Thin Film Solar materials. In late 2006, we added a marketing manager to sell our product to the semiconductor industry.
 
Thin Film Battery materials is a developing market where manufacturers of batteries use these materials to produce very small power supplies, with small quantities of stored energy. A typical Thin Film Battery would be produced via Physical Vapor Deposition (PVD) with five or more thin layers. These batteries are often one centimeter square but only 15 microns thick. Potential applications for these batteries include, but are not limited to: active RFID tags, battery on chip, portable electronics, and medical implant devices.
 
The Offering
 
We have filed a Registration Statement on Form SB-2 with the Securities and Exchange Commission with respect to the securities offered in this prospectus. The Registration Statement became effective April 4, 2006 and continues to be effective. The Registration Statement allows the Selling Shareholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their registered shares of common stock on any stock exchange, market or trading facility on which the registered shares are traded or in private transactions. These sales may be at fixed or negotiated prices. However, the Selling Stockholders listed in this prospectus may choose not to sell any of their registered shares, and may have no intention of selling any securities offered pursuant to this prospectus in the near future. Additionally, we have no reason to believe that any Selling Shareholder has entered into an agreement, or made a commitment to sell any securities offered in this prospectus.



Common stock offered by the
 
Selling Shareholders
  
2,281,253 shares
     
Termination of the offering
 
The offering will conclude when all of the 2,281,253 shares of common stock have been sold, the shares no longer need to be registered or we decide to terminate the registration of the shares.
     
Terms of the offering
 
The Selling Shareholders will determine when and how they will sell the common stock offered in this prospectus.
     
Common stock outstanding as of March 31, 2008
 
3,501,966 shares
     
Use of Proceeds
 
We will not receive any proceeds from the sale of the common stock.
 
An investment in our common stock is highly speculative and involves a high degree of risk. See Risk Factors beginning on page 3.

2


RISK FACTORS  
 
An investment in our common stock is highly speculative, involves a high degree of risk, and should be made only by investors who can afford a complete loss. You should carefully consider the following risk factors, together with the other information in this prospectus, including our financial statements and the related notes, before you decide to buy our common stock. Our most significant risks and uncertainties are described below; however, they are not the only risks we face. If any of the following risks actually occur, our business, financial condition, or results of operations could be materially adversely affected, the trading of our common stock could decline, and you may lose all or part of your investment therein.
 
We have experienced significant operating losses in the past and may continue to do so in the future.
 
We commenced business in May of 1987. We reported net income applicable to common shares of $277,083 for the year ended December 31, 2006, and $307,682 for the year ended December 31, 2007 . There can be no assurance that we will continue to be profitable. Our accumulated deficit since inception was $ 7,526,426 at De cembe r 31, 2007.
 
We have financed the losses primarily from additional investments and loans by our major shareholders and private offerings of common stock and warrants to purchase common stock in 2004 and 2005. We cannot assure you, however, that we will be able to raise additional capital in the future to fund our operations.
 
We have limited marketing and sales capabilities.
 
We hired a full time sales engineer in 2007 and a full time marketing manager in 2006, to expand our marketing activities, especially in the solar area of the photonics market and in the semiconductor market. To successfully market our products, we must continue to develop appropriate marketing, sales, technical, customer service and distribution capabilities, or enter into agreements with third parties to provide these services. Our failure to develop these capabilities or obtain third-party agreements could adversely affect us.
 
Our success depends on our ability to retain key management personnel.
 
Our success depends in large part on our ability to attract and retain highly qualified management, administrative, manufacturing, sales, and research and development personnel. Due to the specialized nature of our business, it may be difficult to locate and hire qualified personnel. The loss of the services of one of our executive officers or other key personnel, or our failure to attract and retain other executive officers or key personnel, could have a material adverse effect on our business, operating results and financial condition. Although we have been successful in planning for and retaining highly capable and qualified successor management in the past, there can be no assurance that we will be able to do so in the future.
 
We may need to seek additional capital in the future, which may reduce the value of our common stock.
 
We reported net income of $277,083 for 2006 and $307,682 for 2007. We incurred substantial operating losses prior to 2006. There is no assurance that our profitable operations will continue and we could be required to seek additional capital in the future for growth and working capital purposes as well. There is no assurance that new capital will be available or that it will be available on terms that will not result in substantial dilution or reduction in value of our common stock.
 
Our competitors have far greater financial and other resources than we have.
 
The market for Physical Vapor Deposition materials is a substantial market with significant competition in both ceramic and metal materials. While we believe that our products enjoy certain competitive advantages in design, function, quality, and availability, considerable competition exists from well-established firms, such as Williams Advanced Materials, Kurt Lesker and Tosoh, all of which have more resources than we have. We cannot provide assurance that developments by others will not render our products or technologies obsolete or less competitive.

3


Our revenues depend on patents and proprietary rights that may not be enforceable.
 
We rely on a combination of patent and trademark law, license agreements, internal procedures and nondisclosure agreements to protect our intellectual property. These may be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our products may be produced or sold do not protect our intellectual property rights to the same extent as the laws of the United States. Our failure to protect our proprietary information could adversely affect us.
 
Rights we have to patents and pending patent applications may be challenged.
 
We have received from the United States Patent and Trademark Office a patent for Fine-Particle Bi-Sr-Ca-Cu-O Having High Phase Purity made by a Chemical Precipitation and Low-Pressure Calcination method, and have also received a patent for a process to join two individual strongly linked super-conductors utilizing a melt processing technique. In the future, we may submit additional patent applications covering various applications. The patent application we filed and patent applications that we may file in the future may not result in patents being issued, and any patents issued may not afford meaningful protection against competitors with similar technology, and may be challenged by third parties. Because U.S. patent applications are maintained in secret until patents are issued, and because publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, we may not be the first creator of inventions covered by issued patents or pending patent applications or the first to file patent applications for such inventions. Moreover, other parties may independently develop similar technologies, duplicate our technologies or, if patents are issued to us or rights licensed by us, design around the patented aspects of any technologies we developed or licensed. We may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions, which could result in substantial costs. Litigation may also be necessary to enforce any patents held by or issued to us or to determine the scope and validity of others' proprietary rights, which could result in substantial costs.
 
The rapid technological changes of our industry may adversely affect us if we do not keep pace with advancing technology.
 
The Physical Vapor Deposition market is characterized by rapidly advancing technology. Our success depends on our ability to keep pace with advancing technology and processes and industry standards. To date, we have focused our development efforts on powders and targets. We intend to continue to develop and integrate advances in the thin film coatings industry. However, our development efforts may be rendered obsolete by research efforts and technological advances made by others, and materials other than those we currently use may prove more advantageous.
 
Development stage of our products and uncertainty regarding development of markets.
 
Some of our products are in the early stages of commercialization and we believe that it will be several years before products will have significant commercial end-use applications, and that significant additional development work may be necessary to improve the commercial feasibility and acceptance of its products. There can be no assurance that we will be able to commercialize any of the products currently under development.
 
To date, there has been no widespread commercial use of High Temperature Superconductive (HTS) products. Additionally, the market for the Thin Film Battery materials is still in its early stages. Some of our materials are in early stages of development for Thin Film Solar applications. Thin Film Solar is expected to gain significant market share during the next few years.

4


The market for our common stock is limited and, as such, our shareholders may have difficulty reselling their shares when desired or at attractive market prices.
 
Our stock price and our listing may make it more difficult for our shareholders to resell shares when desired or at attractive prices. In 2001, our stock began trading on The Over the Counter Bulletin Board (“OTC Bulletin Board”). Nevertheless, our common stock has continued to trade in low volumes and at low prices. Some investors view low-priced stocks as unduly speculative and therefore not appropriate candidates for investment. Many institutional investors have internal policies prohibiting the purchase or maintenance of positions in low-priced stocks.
 
This has the effect of limiting the pool of potential purchases of our common stock at present price levels. Shareholders may find greater percentage spreads between bid and asked prices, and more difficulty in completing transactions and higher transaction costs when buying or selling our common stock than they would if our stock were listed on a major stock exchange, such as The New York Stock Exchange or The Nasdaq National Market.
 
Prior to the fourth quarter of 2006, our common stock was subject to the Securities and Exchange Commission’s “penny stock” regulations, which limits the liquidity of common stock held by our shareholders.
 
Based on its trading prior to the fourth quarter of 2006, our common stock was considered a “penny stock” for purposes of federal securities laws, and therefore was subject to regulations which affected the ability of broker-dealers to sell our securities. During 2007 our stock traded above the penny stock threshold but has recently once again slipped below the threshold. Broker-dealers who recommend a “penny stock” to persons (other than established customers and accredited investors) must make a special written suitability determination and receive the purchaser’s written agreement to a transaction prior to sale. There can be no assurance that our common stock will once again rise above the penny stock threshold or follow below the threshold in the future.
 
During times when the penny stock regulations apply to our stock, it may be difficult to trade such stock because compliance with the regulations can delay and/or preclude certain trading transactions. Broker-dealers may be discouraged from effecting transactions in our common stock because of the sales practice and disclosure requirements for penny stock. This could adversely affect the liquidity and/or price of our common stock, and impede the sale of our common stock in the secondary market.
 
Our Articles of Incorporation authorize us to issue additional shares of stock.
 
We are authorized to issue up to 15,000,000 shares of common stock, which may be issued by our board of directors for such consideration as they may consider sufficient without seeking shareholder approval. The issuance of additional shares of common stock in the future will reduce the proportionate ownership and voting power of current shareholders.
 
Our Articles of Incorporation authorize us to issue up to 260,000 shares of preferred stock. The issuance of preferred stock in the future could create additional securities which would have dividend and liquidation preferences prior in right to the outstanding shares of common stock. These provisions could also impede a non-negotiated change in control.
 
We have not paid dividends on our common stock in the past and do not expect to do so in the future.
 
We cannot assure you that our operations will result in sufficient revenues to enable us to operate at profitable levels or to generate positive cash flow sufficient to pay dividends. We have never paid dividends on our common shares in the past and do not expect to do so in the foreseeable future.
 
USE OF PROCEEDS
 
This prospectus relates to shares of our common stock that may be offered and sold from time to time by the Selling Shareholders. We will receive no proceeds from the sale of shares of common stock in this offering.

5


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. In this prospectus, we use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including, among other things:
 
 
·
general economic and business conditions, both nationally and in our markets,
 
·
our history of losses,
 
·
our expectations and estimates concerning future financial performance, financing plans and the impact of competition,
 
·
our ability to implement our growth strategy,
 
·
anticipated trends in our business,
 
·
advances in technologies, and
 
·
other risk factors set forth under “Risk Factors” in this prospectus.

We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.
 
[Remainder of page intentionally left blank]

6


SELLING SHAREHOLDERS
 
The following table presents information regarding the Selling Shareholders and the shares that may be sold by them pursuant to this prospectus. See also Security Ownership of Certain Beneficial Owners and Management.

Selling
Shareholders
 
Shares
Owned
Before
Offering
 
Percentage of
Outstanding
Shares
Owned Before
Offering (1)
 
Shares to
be Sold in
the Offering
 
Percentage
of
Outstanding
Shares
Owned
After
Offering (1)
 
Windcom Investments SA (2)
   
335,205
   
9.7
%
 
335,205
   
0
%
Lake Street Fund L.P.(3)
   
312,500
   
9.0
%
 
312,500
   
0
%
Berlin Capital Growth L.P.(4)
   
281,250
   
8.1
%
 
281,250
   
0
%
Mid South Investor Fund L.P. (5)
   
250,000
   
7.2
%
 
250,000
   
0
%
Robert Peitz (6)
   
301,790
   
8.6
%
 
252,016
   
1.4
%
Thomas Berlin (7)
   
406,250
   
11.6
%
 
125,000
   
0
%
Daniel Funk (8)
   
150,125
   
4.3
%
 
119,716
   
*
 
Laura Shunk (9)
   
158,255
   
4.6
%
 
119,716
   
1.1
%
The Estate of Edward R. Funk (10)
   
437,256
   
12.3
%
 
117,500
   
8.8
%
James Chapman (11)
   
67,250
   
2.0
%
 
67,250
   
0
%
The Estate of Ingeborg V. Funk (12)
   
462,852
   
13.2
%
 
62,500
   
11.4
%
Lyman O. Heidtke (13)
   
62,500
   
1.8
%
 
62,500
   
0
%
Porter Wright Morris & Arthur, LLP (14)
   
56,250
   
1.6
%
 
56,250
   
0
%
Michael Harrington (15)
   
40,250
   
1.2
%
 
40,250
   
0
%
Richard Gambs (16)
   
37,500
   
1.1
%
 
37,500
   
0
%
Robert Lentz (17)
   
17,500
   
*
   
17,500
   
0
%
Walter Henry Hauser (18)
   
7,500
   
*
   
7,500
   
0
%
Brenda M. Hauser(19)
   
7,500
   
*
   
7,500
   
0
%
Eugene J. Burksa & Renee J. Burksa JTTEN (20)
   
4,800
   
*
   
4,800
   
0
%
Christopher Forte (21)
   
4,800
   
*
   
4,800
   
0
%
 

* Represents beneficial ownership of less than 1% of our outstanding common stock.

(1)
The number of shares listed in these columns include all shares beneficially owned and all options or warrants to purchase shares held, whether or not deemed to be beneficially owned, by each selling shareholder prior to the effective date of the offering. The ownership percentages listed in these columns include only shares beneficially owned by the listed selling shareholder as of March 10, 2006. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the percentage of shares beneficially owned by a selling shareholder, shares of common stock subject to options or warrants held by that selling shareholder that were exercisable on or within 60 days after March 10, 2006, were deemed outstanding for the purpose of computing the percentage ownership of that selling shareholder. The ownership percentages are calculated assuming that 3,425,915 shares of common stock were outstanding on March 10, 2006 Shares and options or warrants acquired by a selling shareholder subsequent to March 10, 2006 are not reflected in the columns set forth above and may continue to be held by such shareholder following the close of the offering.

7


(2)
Prior to giving effect to the offering, Windcom Investments SA held 314,919 shares of our common stock and exercisable warrants to purchase 20,286 shares of our common stock. Following the offering, Windcom Investments SA will not hold any shares of common stock or warrants to purchase shares of common stock held by it prior to the effective date of the offering.

(3)
Prior to giving effect to the offering, Lake Street Fund L.P. held 250,000 shares of our common stock and exercisable warrants to purchase 62,500 shares of our common stock. Following the offering, Lake Street Fund L.P. will not hold any shares of common stock or warrants to purchase shares of common stock held by it prior to the effective date of the offering.

(4)
Prior to giving effect to the offering, Berlin Capital Growth L.P. held 229,167 shares of our common stock and exercisable warrants to purchase 52,083 shares of our common stock. Following the offering, Berlin Capital Growth L.P. will not hold any shares of common stock or warrants to purchase shares of common stock held by it prior to the effective date of the offering.

(5)
Prior to giving effect to the offering, Mid South Investor Fund L.P. held 200,000 shares of our common stock and exercisable warrants to purchase 50,000 shares of our common stock. Following the offering, Mid South Investor Fund L.P. will not hold any shares of common stock or warrants to purchase shares of common stock held by it prior to the effective date of the offering.

(6)
Prior to giving effect to the offering, Robert Peitz, a member of the Company’s Board of Directors, held 200,828 shares of our common stock and exercisable options and warrants to purchase 100,962 shares of our common stock. Following the offering, Robert Peitz will continue to hold 24,400 shares of common stock and warrants to purchase 25,374 shares of common stock held by him prior to the effective date of the offering.

(7)
Prior to giving effect to the offering, Thomas Berlin held 333,334 shares of our common stock and exercisable warrants to purchase 72,916 shares of our common stock. Following the offering, Thomas Berlin will not hold any shares of common stock or warrants to purchase shares of common stock held by him prior to the effective date of the offering. Mr. Berlin’s ownership as of the date of the offering included 281,250 shares of common stock beneficially owned by Berlin Capital Growth L.P., of which 52,083 shares of common stock can be acquired under stock purchase warrants. Mr. Berlin has shared voting and dispositive power over the shares of common stock in this limited partnership as the controlling principal of Berlin Capital Growth L.P. Mr. Berlin’s ownership also included 20,833 shares of common stock, which can be acquired by Mr. Berlin under stock purchase warrants.

(8)
Prior to giving effect to the offering, Daniel Funk held 103,264 shares of our common stock and exercisable warrants to purchase 46,861 shares of our common stock. Following the offering, Daniel Funk will continue to hold 3,500 shares of common stock and warrants to purchase 26,909 shares of common stock held by him prior to the effective date of the offering.

(9)
Prior to giving effect to the offering, Laura Shunk held 111,394 shares of our common stock and exercisable warrants to purchase 46,861 shares of our common stock. Following the offering, Laura Shunk will continue to hold 11,630 shares of common stock and warrants to purchase 26,909 shares of common stock held by her prior to the effective date of the offering.

(10)
Prior to giving effect to the offering, The Estate of Edward R. Funk held 309,356 shares of our common stock and exercisable warrants and options to purchase 127,900 shares of our common stock. Following the offering, The Estate of Edward R. Funk will continue to hold 215,356 shares of common stock and warrants and options to purchase 104,400 shares of common stock held by it prior to the effective date of the offering.

(11)
Prior to giving effect to the offering, James Chapman held 55,000 shares of our common stock and exercisable warrants to purchase 12,250 shares of our common stock. Following the offering, James Chapman will not hold any shares of common stock or warrants to purchase shares of common stock held by him prior to the effective date of the offering.

(12)
Prior to giving effect to the offering, The Estate of Ingeborg V. Funk held 375,352 shares of our common stock and exercisable warrants and options to purchase 87,500 shares of our common stock. Following the offering, The Estate of Ingeborg V. Funk will continue to hold 325,352 shares of common stock and warrants and options to purchase 75,000 shares of common stock held by it prior to the effective date of the offering.

(13)
Prior to giving effect to the offering, Lyman O. Heidtke held 50,000 shares of our common stock and exercisable warrants to purchase 12,500 shares of our common stock. Following the offering, Lyman O. Heidtke will not hold any shares of common stock or warrants to purchase shares of common stock held by him prior to the effective date of the offering.

8


(14)
Prior to giving effect to the offering, Porter, Wright, Morris & Arthur, LLP held 45,000 shares of our common stock and exercisable warrants to purchase 11,250 shares of our common stock. Following the offering, Porter, Wright, Morris & Arthur, LLP will not hold any shares of common stock or warrants to purchase shares of common stock held by it prior to the effective date of the offering.

(15)
Prior to giving effect to the offering, Michael Harrington held 33,000 shares of our common stock and exercisable warrants to purchase 7,250 shares of our common stock. Following the offering, Michael Harrington will not hold any shares of common stock or warrants to purchase shares of common stock held by him prior to the effective date of the offering.

(16)
Prior to giving effect to the offering, Richard Gambs held 30,000 shares of our common stock and exercisable warrants to purchase 7,500 shares of our common stock. Following the offering, Richard Gambs will not hold any shares of common stock or warrants to purchase shares of common stock held by him prior to the effective date of the offering.

(17)
Prior to giving effect to the offering, Robert Lentz held exercisable warrants to purchase 17,500 shares of our common stock. Following the offering, Robert Lentz will not hold any shares of common stock or warrants to purchase shares of common stock held by him prior to the effective date of the offering.

(18)
Prior to giving effect to the offering, Walter Henry Hauser held 5,000 shares of our common stock and exercisable warrants to purchase 2,500 shares of our common stock. Following the offering, Walter Henry Hauser will not hold any shares of common stock or warrants to purchase shares of common stock held by him prior to the effective date of the offering.

(19)
Prior to giving effect to the offering, Brenda M. Hauser held 7,500 shares of our common stock. Following the offering, Brenda M. Hauser will not hold any shares of common stock held by her prior to the effective date of the offering.

(20)
Prior to giving effect to the offering, Eugene J. Burksa & Renee J. Burksa JTTEN held 4,000 shares of our common stock and exercisable warrants to purchase 800 shares of our common stock. Following the offering, Eugene J. Burksa & Renee J. Burksa JTTEN will not hold any shares of common stock or warrants to purchase shares of common stock held by them prior to the effective date of the offering.

(21)
Prior to giving effect to the offering, Christopher Forte held 4,000 shares of our common stock and exercisable warrants to purchase 800 shares of our common stock. Following the offering, Christopher Forte will not hold any shares of common stock or warrants to purchase shares of common stock held by him prior to the effective date of the offering.
 
PLAN OF DISTRIBUTION
 
We filed a Registration Statement on Form SB - 2, as amended, with the Securities and Exchange Commission with respect to the securities offered in this prospectus. That Registration Statement was declared effective on April 4, 2006 and enables the Selling Shareholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their registered shares of common stock on any stock exchange, market or trading facility on which the registered shares are traded or in private transactions. These sales may be at fixed or negotiated prices. However, the Selling Stockholders listed in this prospectus may choose not to sell any of their registered shares, and may have no intention of selling any securities offered pursuant to this prospectus in the near future. Additionally, we have no reason to believe that any Selling Shareholder has entered into an agreement, or made a commitment to sell any securities offered in this prospectus. If Selling Shareholders choose to sell securities offered in this prospectus, they may use any one or more of the following methods when selling shares:
 
 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits investors;
 
 
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
 
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
 
9


 
·
an exchange distribution in accordance with the rules of the applicable exchange;
 
 
·
privately negotiated transactions;
 
 
·
to cover short sales made after the date that this Registration Statement is declared effective by the Commission;
 
 
·
broker-dealers may agree with the Selling Shareholders to sell a specified number of such shares at a stipulated price per share;
 
 
·
a combination of any such methods of sale; and
 
 
·
any other method permitted pursuant to applicable law.
 
The Selling Shareholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
 
Broker-dealers engaged by the Selling Shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Shareholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Shareholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
 
The Selling Shareholders may from time to time pledge or grant a security interest in some or all of the Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of Selling Shareholders to include the pledgee, transferee or other successors in interest as Selling Shareholders under this prospectus.
 
Upon the Company being notified in writing by a Selling Shareholder that any material arrangement has been entered into with a broker-dealer for the sale of common stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Shareholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such the shares of common stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified in writing by a Selling Shareholder that a donee or pledgee intends to sell more than 500 shares of common stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law.
 
The Selling Shareholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
 
The Selling Shareholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of securities will be paid by the Selling Shareholder and/or the purchasers. Each Selling Shareholder has represented and warranted to the Company that it acquired the securities subject to this Registration Statement in the ordinary course of such Selling Shareholder’s business and, at the time of its purchase of such securities such Selling Shareholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities.

10


The Company has advised each Selling Shareholder that it may not use shares registered on this Registration Statement to cover short sales of Common Stock made prior to the date on which this Registration Statement shall have been declared effective by the Securities and Exchange Commission. If a Selling Shareholder uses this prospectus for any sale of the common stock, it will be subject to the prospectus delivery requirements of the Securities Act. The Selling Shareholders will be responsible to comply with the applicable provisions of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such Selling Shareholders in connection with resales of their respective shares under this Registration Statement.
 
The Company is required to pay all fees and expenses incident to the registration of the shares, but the Company will not receive any proceeds from the sale of the common stock. The Company is not required to pay any brokerage fee or other fees in connection with the sale of securities by the Selling Shareholders listed in this prospectus.
 
OUR MANAGEMENT  
 
Directors, Executive Officers, Promoters and Control Persons
 
Directors
 
Our directors each serve for one-year terms, which expire at the next Annual Meeting of Shareholders. The following table sets forth for each director of the Company, such person’s name, age, and his position with the Company:
 
Name
  
Age
  
Position
         
Daniel Rooney
 
54
 
President, Chief Executive Officer and
       
Chairman of the Board of Directors
         
Robert J. Baker, Jr.
 
68
 
Director
         
Edward W. Ungar
 
71
 
Director
         
Walter J. Doyle
 
73
 
Director
         
Robert H. Peitz
 
47
 
Director

Daniel Rooney has served as a Director of the Company since joining the Company in March 2002 as President and Chief Executive Officer. Mr. Rooney was elected as the Chairman of the Board of Directors of the Company on January 8, 2003. Prior to joining the Company, Mr. Rooney was General Manager for Johnson Matthey, Color and Coatings Division, Structural Ceramics Sector North America from 1994 to 2001. Prior to that, Mr. Rooney held various management positions at TAM Ceramics, Inc., a Cookson Group Company. Mr. Rooney has a Bachelor of Science degree in Ceramic Engineering from Rutgers College of Engineering and a MBA from Niagara University.
 
Robert J. Baker, Jr., Ph.D. has served as a Director of our Company since 1992. Dr. Baker is the President and founder of Venture Resources International and the co-founder of Business Owners Consulting Group, which assists companies in the development of growth strategies, including marketing position and competitive strategies. Dr. Baker graduated from the University of Illinois with B.S., M.S., and Ph. D. degrees in Ceramic Engineering. In addition, he is a Sloan Fellow at MIT where he earned a Management Science degree.
 
Edward W. Ungar has been a Director of the Company since 1990. Mr. Ungar is the President and founder of Taratec Corporation, a technology business consulting firm in Columbus, Ohio. Prior to forming Taratec Corporation in 1986, Mr. Ungar was an executive with Battelle Memorial Institute. Mr. Ungar earned Ph.D. and M.S. degrees in Mechanical Engineering from The Ohio State University and a B.M.E. in Mechanical Engineering from City College of New York.  
 
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Walter J. Doyle has served as a Director of the Company since 2004. Mr. Doyle is the President of Forest Capital, an angel capital firm. Previously, Mr. Doyle was President and CEO of Industrial Data Technologies Corp. for 21 years. Mr. Doyle earned an Electrical Engineering degree from City College of New York (CCNY) and an MBA from the Harvard Business School.
 
Robert H. Peitz has served as a Director of the Company since 2004. Mr. Peitz is the former Managing Director and Head of Financial Markets for PB Capital in New York, New York. Previously, Mr. Peitz was a Managing Director at BHF Capital, Treasurer of BHF-Bank New York Branch and an Associate at Morgan Stanley in International Operations. Mr. Peitz graduated from the University of Cincinnati with a Bachelor of Arts in Economics and has an MBA from the Thunderbird School of Global Management.
 
The Board of Directors is seeking individual(s) to strengthen the Company’s board.
 
Executive Officers
 
In addition to Mr. Rooney, the following persons are executive officers of the Company:
 
Gerald S. Blaskie , age 50, has served as the Company’s Chief Financial Officer since April 2001. On March 2, 2006, the Board of Directors of the Company appointed Mr. Blaskie to the position of Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Blaskie was the Controller at Cable Link, Inc. from February 2000 to March 2001. From 1997 to 2000, he was the Plant Manager at Central Ohio Plastics Corporation, where he also served as Controller from 1993 to 1997. Mr. Blaskie earned a B.S. degree in Accounting from Central Michigan University and passed the CPA exam in the State of Ohio.
 
Scott Campbell , Ph.D .,   age 50, has served as the Company’s Vice President of Technology since March 2005. Dr. Campbell served as the Company’s Vice President of Research and Engineering from July 2004 to March 2005. Dr. Campbell joined the Company in July 2002 as the Company’s Technical Director. Prior to joining the Company, he was Senior Research Manager at Oxynet, Inc. for five years. Dr. Campbell earned his Ph.D., Metallurgy, from the University of Illinois of Chicago. In addition, he earned M.S. and B.S. degrees in Ceramic Engineering from The Ohio State University. He is a member of the American Vacuum Society and the Materials Research Society.
 
Michael K. Barna , age 51, has served as Vice President, Sales-Photonics, since March 2, 2006. Mr. Barna joined the Company as Director of Sales and Marketing in January 2004. Prior to joining the Company, Mr. Barna had more than 20 years of experience in thin film sales, including major account sales of Physical Vapor Deposition equipment, high purity targets and evaporation materials for these systems, hybrid microelectronic, telecommunications, and commercial glass coating markets. Mr. Barna earned a B.S. degree in Mechanical Engineering from the University of Kentucky.
 
Officers are elected annually by the Board of Directors and serve at its discretion.
 
Family Relationships
 
There are no family relationships among the directors and executive officers of the Company.
 
Audit Committee Financial Expert
 
Mr. Ungar is Chairman of our Audit Committee, and the members are Messrs. Baker and Doyle. Our Board of Directors has determined that Messrs. Ungar and Doyle qualify as “audit committee financial experts” as that term is defined in Item 401(e) of Regulation S-B. Messrs. Ungar and Doyle and Dr. Baker each meet the criteria for audit committee independence as defined in NASDAQ Rule 4350, and Rule 10A-3 promulgated under the Exchange Act.
 
12


Ownership of Common Stock by Directors and Executive Officers
 
The following table sets forth, as of March 31, 2008, the beneficial ownership of the Company’s common stock by each of the Company’s directors, each executive officer named in the Summary Compensation Table, and by all directors and executive officers as a group.

13

 
Name of Beneficial Owner (1)
 
Number of Shares
Beneficially
Owned (2)
 
Percentage of
Class (3)
 
Robert H. Peitz (4)
   
714,953
   
19.3
%
               
Daniel Rooney (5)
   
141,152
   
3.9
%
               
Walter J. Doyle (6)
   
120,238
   
3.4
%
               
Robert J. Baker, Jr. (7)
   
75,051
   
2.1
%
               
Scott Campbell (8)
   
66,000
   
1.8
%
               
Edward W. Ungar (9)
   
56,188
   
1.6
%
               
Michael K. Barna (10)
   
55,000
   
1.5
%
               
All directors and executive officers as a group (8 persons) (11)
   
1,284,582
   
31.1
%
 

 
(1)   The address of all directors and executive officers is c/o SCI Engineered Materials, Inc., 2839 Charter Street, Columbus, Ohio 43228.
 
(2)   For purposes of the above table, a person is considered to “beneficially own” any shares with respect to which he exercises sole or shared voting or investment power or as to which he has the right to acquire the beneficial ownership within 60 days of March 31, 2008. Unless otherwise indicated, voting power and investment power are exercised solely by the person named above or shared with members of his or her household.
 
(3)   “Percentage of Class” is calculated by dividing the number of shares beneficially owned by the total number of outstanding shares of the Company on March 31, 2008, plus the number of shares such person has the right to acquire within 60 days of March 31, 2008.
 
(4)   Mr. Peitz’ ownership includes 199,162 shares of common stock beneficially owned by Park National Bank (Trustee for the Ingeborg Funk Children’s Trust), of which 43,750 shares of common stock can be acquired under stock purchase warrants exercisable within 60 days of March 31, 2008. Mr. Peitz’ ownership also includes 154,712 shares of common stock, which can be acquired by Mr. Peitz under stock options and purchase warrants exercisable within 60 days of March 31, 2008.
 
(5)   Includes 128,000 common shares, which may be acquired by Mr. Rooney under stock options exercisable within 60 days of March 31, 2008 and 11,300 shares which are held in Mr. Rooney’s IRA.
 
(6)   Includes 24,250 common shares, which may be acquired by Mr. Doyle under stock purchase warrants exercisable within 60 days of March 31, 2008.
 
(7)   Includes 51,000 common shares, which may be acquired by Dr. Baker under stock options exercisable within 60 days of March 31, 2008, and 16,063 shares which are held in Dr. Baker’s IRA.

14


(8)   Includes 66,000 common shares, which may be acquired by Dr. Campbell under stock options exercisable within 60 days of March 31, 2008.
 
(9)   Includes 51,000 common shares, which may be acquired by Mr. Ungar under stock options exercisable within 60 days of March 31, 2008.
 
(10)   Includes 52,000 common shares, which may be acquired by Mr. Barna under stock options exercisable within 60 days of March 31, 2008.
 
(11)   Includes 626,712 common shares, which may be acquired under stock options and stock purchase warrants exercisable within 60 days of March 31, 2008.
 
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
The following table sets forth information as of March 31, 2008, relating to the beneficial ownership of common stock by each person known by the Company to own beneficially more than 5% of the outstanding shares of common stock of the Company.   

Name of Beneficial Owner (1)
 
Number of Shares
Beneficially
Owned (2)
 
Percentage of
Class (3)
 
Robert H. Peitz (4)
   
714,953
   
19.3
%
               
Thomas G. Berlin (5)
   
408,197
   
11.4
%
               
Laura Shunk (6)
   
403,328
   
11.2
%
               
Daniel Funk (7)
   
401,129
   
11.2
%
               
Curtis A. Loveland (8)
   
334,956
   
9.4
%
               
Windcom Investments SA (9)
   
332,810
   
9.4
%
               
Lake Street Fund L.P. (10)
   
310,300
   
8.7
%
               
Berlin Capital Growth L.P. (11)  
   
290,497
   
8.2
%
               
Mid South Investor Fund L.P. (12)  
   
250,000
   
7.0
%
               
Ingeborg Funk Children’s Trust (13)
   
199,162
   
5.6
%
 

 
(1)   The address of Robert H. Peitz is c/o SCI Engineered Materials, Inc., 2839 Charter Street, Columbus, Ohio 43228. The address of Thomas G. Berlin is c/o Berlin Financial Ltd., 1325 Carnegie Avenue, Cleveland, Ohio 44115. The address of Laura Shunk is PO Box 490, Chesterland, Ohio 44026. The address of Daniel Funk is 2123 Auburn Avenue, Suite 322, Cincinnati, Ohio 45219. The address of Curtis A. Loveland is c/o Porter, Wright, Morris & Arthur LLP, 41 South High Street, Columbus, Ohio 43215. The address of Windcom Investments SA is Corso Elvezia 25, 6900 Lugan, CH. The address of Lake Street Fund L.P. is 600 South Lake Avenue, Suite 100, Pasadena, California 91106. The address of Berlin Capital Fund, L.P. is c/o Thomas G. Berlin, Berlin Financial Ltd., 1325 Carnegie Avenue, Cleveland, Ohio 44115. The address of Mid South Investor Fund L.P. is 1776 Peachtree St. NW, Suite 412 North, Atlanta, Georgia 30309. The address of the Ingeborg Funk Children’s Trust is c/o Tom Comisky, Park National Bank, 50 N. 3 rd Street, Newark, Ohio 43058.

15


(2)   For purposes of this table, a person is considered to “beneficially own” any shares with respect to which he or she exercises sole or shared voting or investment power or as to which he or she has the right to acquire the beneficial ownership within 60 days of March 31, 2008. Unless otherwise indicated, voting power and investment power are exercised solely by the person named above or shared with members of his or her household.
 
(3)   “Percentage of Class” is calculated by dividing the number of shares beneficially owned by the total number of outstanding shares of the Company on March 31, 2008, plus the number of shares such person has the right to acquire within 60 days of March 31, 2008.
 
(4)   Mr. Peitz’ ownership includes 199,162 shares of common stock beneficially owned by Park National Bank (Trustee for the Ingeborg Funk Children’s Trust), of which 43,750 shares of common stock can be acquired under stock purchase warrants exercisable within 60 days of March 31, 2008. Mr. Peitz’ ownership also includes 154,712 shares of common stock, which can be acquired by Mr. Peitz under stock options and purchase warrants exercisable within 60 days of March 31, 2008.
 
(5)   Mr. Berlin’s ownership includes 290,497 shares of common stock beneficially owned by Berlin Capital Growth L.P., of which 52,083 shares of common stock can be acquired under stock purchase warrants exercisable within 60 days of March 31, 2008. Mr. Berlin has shared voting and dispositive power over the shares of common stock in this limited partnership as the controlling principal of Berlin Capital Growth L.P. Mr. Berlin’s ownership also includes 20,833 shares of common stock, which can be acquired by Mr. Berlin under stock purchase warrants exercisable within 60 days of March 31, 2008.
 
(6)   Includes 98,611 common shares, which may be acquired by Ms. Shunk under stock options and stock purchase warrants exercisable within 60 days of March 31, 2008.
 
(7)   Includes 79,202 common shares, which may be acquired by Dr. Funk under stock options and stock purchase warrants exercisable within 60 days of March 31, 2008.
 
(8)   Includes 51,000 shares of common stock, which can be acquired by Mr. Loveland under stock options exercisable within 60 days of March 31, 2008.
 
(9)   Based on the Schedule 13G/A filed on February 14, 2005, Dr. Karl Kohlbrenner, CEO of Windcom Investments SA, has voting and dispositive power over the shares of common stock on behalf of the Company. Windcom Investments SA’s ownership includes 20,286 shares of common stock, which can be acquired by Windcom Investments SA under stock purchase warrants exercisable within 60 days of March 31, 2008.
 
(10)   Includes 62,500 shares of common stock, which can be acquired by Lake Street Fund L.P. under stock purchase warrants exercisable within 60 days of March 31, 2008.
 
(11)   Includes 52,083 shares of common stock, which can be acquired by Berlin Capital Growth L.P. under stock purchase warrants exercisable within 60 days of March 31, 2008.
 
(12)   Includes 50,000 shares of common stock, which can be acquired by Mid South Investor Fund L.P. under stock purchase warrants exercisable within 60 days of March 31, 2008.
 
(13)   Includes 43,750 shares of common stock, which can be acquired by the Ingeborg Funk Children’s Trust under stock purchase warrants exercisable within 60 days of March 31, 2008.

DESCRIPTION OF SECURITIES
 
The Company's authorized capital stock is 15,260,000 shares, consisting of 15,000,000 common shares, without par value, 125,000 shares of Voting Preferred Shares, without par value and 125,000 shares of Non-Voting Preferred Shares, without par value (collectively, the "Preferred Shares"), of which 100,000 shares are designated as Series B Preferred Shares and 10,000 shares of 10% Cumulative Convertible Preferred Shares, without par value (the "10% Preferred Shares").

16


Common Shares
 
Holders of the common shares have no redemption or conversion rights, participate ratably in any distribution of assets to shareholders in liquidation and have no preemptive or other subscription rights. Holders of common shares are entitled to receive such dividends as may be declared by the board of directors. Holders of common shares are entitled to one vote for each share held on all matters on which shareholders are entitled to vote, and are not entitled to vote cumulatively for the election of directors. The outstanding common shares are fully paid and non-assessable. As of March 31, 2008 , the Company had 3,501, 966 common shares, without par value, outstanding. Of these shares, 1,879,671 shares are held by nonaffiliates and are freely tradable without restriction or further registration under the Securities Act of 1933 or eligible for resale under an exemption from registration. The holders of the remaining   1,622,295 shares are entitled to resell them only pursuant to a Registration Statement under the Securities Act of 1933 or an applicable exemption from registration thereunder.
 
Preferred Shares
 
The Articles of Incorporation of the Company authorize the Board of Directors to adopt amendments to the Articles of Incorporation to provide for the issuance of one or more series of Non-Voting Preferred Shares or Voting Preferred Shares, and to establish from time to time the number of shares to be included in each such series, to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof (the "Blank Check Preferred Stock"). The Company currently has authorized, issued and outstanding Series B Preferred Shares.
 
The issuance of Preferred Shares could be used, under certain circumstances, as a method of delaying or preventing a change in control of the Company and could permit the Board of Directors, without any action by holders of the Series B Preferred Shares, or the common shares, to issue Preferred Stock which could have a detrimental effect on the rights of holders of Series B Preferred Shares, or the common shares. In certain circumstances, this could have the effect of decreasing the market price for the common shares.
 
Series B Preferred Shares
 
The Series B Preferred Shares were authorized under the Blank-Check Preferred Stock provisions of the Company's Articles of Incorporation. Each Series B Preferred Share has a stated value of $10. Except as otherwise provided by Ohio law, the holders of the Series B Preferred Shares have no voting rights. The Series B Preferred Shares are convertible into common shares at the rate of $5.00 per each common share, subject to adjustment for stock splits, stock dividends or any other stock divisions. The Company will pay cash in lieu of fractional shares.
 
Holders of the Series B Preferred Shares are entitled to receive dividends at the rate of 10% of the stated value per annum per share. Dividends will be payable on each anniversary of the issue date, defined as the date on which the Series B Preferred Shares are first issued by the Company. Dividends could be paid in either shares of Series B Preferred Shares or cash, at the Company's option, for the initial three years that the Series B Preferred Shares were outstanding, and thereafter in cash to the extent funds are then legally available for the payment of such cash dividends. The right of the holders of the Series B Preferred Shares to receive such dividends is cumulative, and accrues from the date of issuance of the Series B Preferred Shares.
 
If, at any time, the aggregate amount of cash dividends to be paid by the Company on the Series B Preferred Shares is insufficient to permit the payment of the full amount of cash dividend, then accrued on all issued and outstanding Series B Preferred Shares, then such cash dividends, to the extent payable, will be distributed to the holders of all outstanding Series B Preferred Shares ratably in proportion to the respective amounts of cash dividends then accrued and unpaid on such Series B Preferred Shares. As long as any Series B Preferred Shares will remain outstanding, no cash dividends can be declared or paid on any junior stock or parity stock until all accrued and unpaid cash dividends on the Series B Preferred Shares have been paid to the holders thereof. In the event that any of the Series B Preferred Shares were converted to common shares, prior to a dividend payment date, no payment of or adjustment for dividends yet due will be made on the Series B Preferred Shares converted.
 
17


In the event of any liquidation, dissolution, or winding up of the Company, the holders of the Series B Preferred Shares then outstanding will be entitled to receive out of the assets of the Company, before any distribution or payment is made to the holders of any junior stock, including the common shares, an amount equal to the stated value per share plus any accrued and unpaid cumulative dividends thereon. If upon any liquidation, dissolution, or winding up, amounts distributable to the holders of all Series B Preferred Shares and any parity stock is insufficient to permit the payment of the full liquidation amounts on all issued and outstanding Series B Preferred Shares and parity stock, then the entire assets of the Company available for distribution to the holders of Series B Preferred Shares and parity stock will be distributed to holders of all Series B Preferred Shares and parity stock ratably in proportion to the full preferential amounts to which such holders are respectively entitled. A consolidation merger of the Company with or into any other company or companies, or a sale or transfer of all, or substantially all, of its property shall not be deemed to be a liquidation, dissolution, or winding up of the Company.
 
After the third anniversary of the issue date, the Company is entitled, at its option, to redeem the Series B Preferred Shares, in whole or in part, at redemption price equal to 103% of the stated value, plus the amount of any accrued and unpaid cash dividends thereon, to the date of such redemption. In case of the redemption of only a part of the Series B Preferred Shares, the Series B Preferred Shares to be redeemed will be selected by whatever means the Board of Directors, in its sole discretion, determines.
 
The Company is not obligated to pay to any holder of the Series B Preferred Shares the redemption price for any Series B Preferred Shares to be redeemed until such holder has surrendered to the Company certificates representing such Series B Preferred Shares.
 
The holders of the Series B Preferred Shares have the right and option to convert all or part of the Series B Preferred Shares then owned by them, at any time, into Common Shares.
 
If the Series B Preferred Shares, in whole or in part, are called for redemption, the right to convert such Series B Preferred Shares into common shares shall cease at the close of business on the day prior to the Redemption Date set forth in the notice of redemption.
 
As of December 31, 2007, 24,566 Series B Preferred Shares remained issued and outstanding and had not been converted to shares of common stock. As of December 31, 2007, the Series B Preferred Shares had accrued and unpaid dividends in the amount of $122,830.
 
INTEREST OF NAMED EXPERTS AND COUNSEL
 
The validity of the securities being registered by this Registration Statement is being passed on for the Company by Carlile Patchen & Murphy LLP. As of the date of this Registration Statement, Carlile Patchen & Murphy LLP owned no shares of the Company’s common stock. Michael A. Smith, a partner of Carlile Patchen & Murphy LLP, serves as secretary of the Company.
 
No “expert,” as that term is defined pursuant to the Regulation Section 220.509(a) of Regulation S-B, or “counsel,” as that term is defined pursuant to Regulation Section 220.509(b) of Regulation S-B, was hired on a contingent basis, or will receive a direct or indirect interest in the Company, or was a promoter, underwriter, director or employee of the Company at any time prior to the filing of this Registration Statement.
 
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
 
Section 1701.13(E) of the Ohio Revised Code gives a corporation incorporated under the laws of Ohio power to indemnify any person who is or has been a director, officer or employee of that corporation, or of another corporation at the request of that corporation, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with any threatened, pending or completed action, suit or proceeding, criminal or civil, to which he is or may be made a party because of being or having been such director, officer, employee or agent, provided that in connection therewith, such person is determined to have acted in good faith in what he reasonably believed to be in or not opposed to the best interest of the corporation of which he is a director, officer, employee or agent and without reasonable cause, in the case of a criminal matter, to believe that his conduct was unlawful. The determination as to the conditions precedent to the permitted indemnification of such person is made by the directors of the indemnifying corporation acting at a meeting at which, for the purpose, any director who is a party to or threatened with any such action, suit or proceeding may not be counted in determining the existence of a quorum and may not vote. If, because of the foregoing limitations, the directors are unable to act in this regard, such determination may be made by the majority vote of the corporation's voting shareholders (or without a meeting upon two-thirds written consent of such shareholders), by judicial proceeding or by written opinion of legal counsel not retained by the corporation or any person to be indemnified during the five years preceding the date of determination.
 
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Section 1701.13(E) of the Ohio Revised Code further provides that the indemnification thereby permitted shall not be exclusive of, and shall be in addition to, any other rights that directors, officers, employees or agents have, including rights under insurance purchased by the corporation.
 
Article 5 of the Company's Restated Code of Regulations contains extensive provisions related to indemnification of officers, directors, employees and agents. The Company is required to indemnify its directors against expenses, including attorney fees, judgments, fines and amounts paid in settlement of civil, criminal, administrative, and investigative proceedings, if the director acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company. When criminal proceedings are involved, indemnification is further conditioned upon the director having no reasonable cause to believe that his conduct was unlawful.
 
Entitlement of a director to indemnification shall be made by vote of the disinterested directors of the Company. If there are an insufficient number of such directors to constitute a quorum, the determination to indemnify directors shall be made by one of the following methods: (1) a written opinion of independent legal counsel, (2) vote by the shareholders, or (3) by the court in which the action, suit or proceeding was brought.
 
The Company may pay the expenses, including attorney fees of any director, as incurred, in advance of a final disposition of such action, suit or proceeding, upon receipt by the Company of an undertaking by the affected director(s) in which he (they) agree(s) to cooperate with the Company concerning the action, suit or proceeding, and agree(s) to repay the Company in the event that a court determines that the director’s action, or failure to act, involved an act, or omission, undertaken with reckless disregard for the best interests of the Company.
 
The indemnification provisions of the Articles of Incorporation relating to officers, employees and agents of the Company are similar to those relating to directors, but are not mandatory in nature. On a case-by-case basis, the Company may elect to indemnify them, and may elect to pay their expenses, including attorney fees, in advance of a final disposition of the action, suit, or proceeding, upon the same conditions and subject to legal standards as relate to directors. These indemnification provisions are also applicable to actions brought against directors, officers, employees and agents in the right of the Company. However, no indemnification shall be made to any person adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless, and only to the extent that a court determines, that despite the adjudication of liability, but in view of all of the circumstances of the case, such person is reasonably entitled to indemnity for such expenses as the court shall deem proper. The Company currently carries directors and officers insurance in the amount of one million dollars.
 
The above discussion of the Company's Restated Code of Regulations and of Section 1701.13(E) of the Ohio Revised Code is not intended to be exhaustive and is respectively qualified in its entirety by such documents and statutes.
 
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

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In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
 
DESCRIPTION OF BUSINESS
 
Introduction
 
SCI Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive Components, Inc., an Ohio corporation, was incorporated in 1987. We manufacture ceramic and metal sputtering targets for a variety of industrial applications including Photonics, Semiconductor, Thin Film Battery, and, to a lesser extent High Temperature Superconductive (“HTS”) materials. Photonics currently represents our largest market for our targets. Thin Film Battery is a developing market where manufacturers of batteries use our targets to produce very small power supplies with small quantities of stored energy. Semiconductor is a developing market for us.
 
History of the Company
 
The late Dr. Edward Funk, Sc.D., and his late wife Ingeborg founded SCI in 1987. Dr. Funk, formerly a Professor of Metallurgy at The Ohio State University and a successful entrepreneur, envisioned significant market potential for the newly discovered High Temperature Superconductivity (HTS) material YBCO (T c of 90 o K). Our first product was a 99.999% pure, co-precipitated YBCO 1-2-3 powder. Over the years we expanded our product line by adding other High T c Powders, sintered shapes, single crystal substrates, and non-superconducting sputtering targets.
 
We opened a subdivision, Target Materials Inc. (TMI), in 1991 to supply the increasing worldwide demand for sputtering and laser ablation targets. We became a full service manufacturer of high performance thin film materials, providing a wide selection of metals, ceramics, and alloys for sputtering targets, evaporation sources, and other PVD applications. We served the R&D market as well as the Industrial and Decorative Coating markets. During this time, we began to manufacture targets for the Photovoltaic, Flat Panel Display, and Semiconductor industries.
 
SCI and TMI were merged in 2002. We continued to manufacture complex ceramic, metal, and alloy products for the thin film battery, photovoltaic, media storage, flat panel display, semiconductor, electronic, and photonic industries.
 
In May of 2005, we received ISO 9001:2000 registration, an internationally recognized milestone in our pursuit of quality. This registration enabled us to increase our customer base which has benefited sales since the second quarter of 2005.
 
Over the past two decades, we have developed considerable expertise in the development and ramp-up of manufacturing of novel materials, such as Bismuth Strontium Calcium Copper Oxide (a superconductor), and battery and solar physical vapor deposition targets. Today, we serve a diverse base of domestic and multi-national corporations, universities, and leading research institutions. We actively seek to partner with organizations to provide solutions for difficult material challenges.
 
Throughout our history, we have conducted funded research primarily under grants from entities such as the Department of Energy, the National Science Foundation, NASA, and the Ohio Department of Development. These activities are generally limited to funded research that is consistent with our focus on commercial applications in our principal markets.
 
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Business
 
We are a supplier of materials to the Physical Vapor Deposition (“PVD”) industry. Our customers need our materials to produce nano layers of metals and oxides for advanced material systems. PVD coatings range from every day items to complex computer processors. For example, every day applications include transparent anti-scratch coatings on eyeglasses, shiny coatings on kitchen and bathroom faucets, as well as low emissivity glass for household windows. More technically advanced applications include semiconductors, flat panel displays and an emerging technology - Thin Film Battery.
 
We are focused on three distinct markets within the PVD industry. These markets are Photonics, Semiconductor and Thin Film Battery. During the past 18 months, the Company began to pursue niche opportunities, specifically applications for Solar in the Photonics market and Hard Disk Drive (“HDD”) in the semiconductor market. We receive requests from potential customers in other markets within the PVD industry; however, at this time we have chosen not to pursue them. This disciplined approach enables us to focus on those opportunities that are the best fit for our capabilities and also offer the greatest long-term return. Considerations include our core strengths, resource requirements, and time-to-market issues.
 
The production and sale of HTS materials was the initial focus of our operations and these materials continue to be part of our development efforts. We continue to work with private companies and government agencies to develop new and improved products for future applications; however, our principal business focus is on products positioned for commercialization.
 
Photonics currently represents the largest market for our materials. Our customers are continually identifying new materials that improve the utility of optical coating. This includes improvements in their ability to focus, filter or reflect light, all of which increase the potential demand for the types and amounts of materials we sell in this market. Photonic applications continue to expand as new methods are found to manipulate light waves to enhance the various properties of light. Currently, these include optic devices, reflective coatings and solar products.
 
We have developed new products for the growing Thin Film Solar (“TFS”) market. We are well positioned in the TFS area having supplied materials to that market for about 10 years while the processes were being developed. In 2007, we added over $300,000 of new manufacturing equipment, as well as Engineering and Sales staff to develop new materials to support the anticipated growth of Solar. Our new materials are Transparent Conductive Oxides (“TCO”). Every square foot of a TFS panel is coated with up to 3 layers of TCO, about 1 micron thick. We increased our visibility in the global arena by attending the Photovoltaic International Trade Fair in Milan, Italy held in September of 2007, where we introduced new products for this rapidly expanding market.
 
Thin Film Battery materials is a developing market where manufacturers of batteries use our targets, especially lithium orthophosphate (Li3PO4) and lithium cobalt oxide (LiCoO) as key elements to produce power supplies with small quantities of stored energy. A typical Thin Film Battery would be produced via Physical Vapor Deposition (PVD) with five or more thin layers. These batteries are often one centimeter square but only 15 microns thick. We are the leading provider of Li3PO4 and LiCoO to the emerging Thin Film Battery market. Following several years of industry developments, some Thin Film Battery customers announced the batteries were commercially available. Our customers anticipate the unique properties of these batteries to be used in applications in medical devices, integrated circuits, RFID, smart cards, hand held electronics and many other applications.
 
We had total annual revenues of $10.8 million, $8.0 million and $3.5 million in the years ended December 31, 2007, 2006, and 2005, respectively.
 
Principal suppliers in 2007 were Cabot Supermetals, Lattice Materials and Johnson Matthey. In every case, we believe that suitable alternate vendors can be used to ensure availability of required materials. As volume grows, we may enter into alliances or purchasing contracts with these or other vendors.

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Our largest customer represented over 50% of total revenues in 2007. We had contract research revenue of $57,779 and $42,092 representing 0.5% of total revenue for each of the years ended December 31, 2007 and 2006.
 
Marketing and Sales
 
We use various distribution channels to reach end user markets, including direct sales by our sales persons, independent manufacturers’ representatives in the United States, and independent distributors for international markets. The Internet provides tremendous reach for new customers to be able to identify us as a source of their product needs. We have an operating website www.sciengineeredmaterials.com , which we upgraded in 2006 to include expanded online product inquiry capabilities and additional product information. As mentioned earlier, in 2007 we added a sales engineer to further drive our sales efforts in the Solar area of the Photonics market. In 2006, we added a marketing manager to increase our sales efforts in the Semiconductor market.
 
Ceramics
 
We are capable of producing ceramic powders via several different processing techniques including solid state, precipitation and combustion synthesis. Ceramic targets can also be produced in a variety of ways depending on the end user applications. Production techniques include sintering, cold isostatic pressing and hot pressing.
 
Most of our products are manufactured from component chemicals and metals supplied by various vendors. If we suddenly lost the services of a supplier, there could be a disruption in our manufacturing process until the supplier was replaced. We have identified several firms as potential back-up suppliers who would be capable of supplying these materials to us as necessary. To date, we have not experienced an interruption of raw material supplies.
 
Metals
 
In addition to the ceramic targets previously mentioned, we produce metal sputtering targets and backing plates. The targets are bonded to the backing plates for application in the PVD industry. These targets can be produced by casting, hot pressing and machining of metals and metal alloys depending on the application.
 
Applications for metal targets are highly varied from applying decorative coatings for end uses such as sink faucets to the production of various electronic, photonic and semiconductor products.
 
We purchase various metals of reasonably high purity (often above 99.9%) for our applications. We are not dependent on a single source for these metals and do not believe losing a vendor would materially affect our business.
 
We have continually added production processes and testing equipment for the many product compositions that can be used as PVD materials .
 
Competition
 
We have a number of domestic and international competitors in both the ceramic and metal fields, many of whom have resources far in excess of our resources. Tosoh, Williams Advanced Materials, Kurt Lesker and Plasmaterials are competing suppliers in regard to targets. Dowa Chemicals of Japan supplies HTS materials.
 
Research and Development  
 
We are developing sputtering targets for semiconductor applications which could be used to produce high K dielectric films via PVD processing. We focus our research and development efforts in areas that build on our expertise in multi-component ceramic oxides.
 
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Contract research revenues were $57,779 during 2007, compared to $42,092 for 2006 . We received notification during the second quarter of 2007 from the Department of Energy of a Notice of Financial Assistance Award in the amount of $97,900. This award provides support for Phase I of a Small Business Innovative Research (SBIR) award entitled “Flux Pinning Additions to Increase Jc Performance in BSCCO-2212 Round Wire for Very High Field Magnets.” The work on the contract began during the third quarter of 2007 and is expected to be completed during the first half of 2008.
 
Revenue during 2006 was also from the United States Department of Energy. This contract provided support for Phase I of an SBIR entitled “Feasibility of Cost Effective, Long Length, BSCCO 2212 Round Wires, for Very High Field Magnets Beyond 12 Tesla at 4.2 Kelvin.” The work on the contract was completed in 2006.
 
We intend to continue to seek funded research opportunities within our core competencies that maintain and expand technical understanding within our company.
 
We have certain proprietary knowledge and trade secrets related to the manufacture of ceramic oxide PVD materials and patents covering some HTS products .
 
New Product Initiatives    
 
During 2006, we began work to develop transparent conductive oxide materials for the fast growing Thin Film Solar market. Three materials were identified for development. One of these three materials was tested in a prototype application in 2006. Initial testing yielded positive results and testing continues. A customer has ordered this material twice for their manufacturing scale equipment and reported good results. We anticipate commercialization of this product line.
 
We have undertaken research and development opportunities with respect to new and innovative materials and processes to be used in connection with the production of Thin Film Batteries. Presently, there are approximately five manufacturers of Thin Film Batteries in the country, each in various stages of development from prototype to commercial activity. In addition there are several firms and research institutes conducting tests on Thin Film Batteries. We believe this market may potentially become very large with significant growth expected during the next two years. There are numerous applications for Thin Film Batteries, including, but not limited to, active RFID tags, battery on chip, portable electronics, and medical implant devices. Given the many potential uses for Thin Film Batteries, we anticipate that the market for materials it produces will grow in direct correlation to the Thin Film Battery market itself.
 
We currently face competition from other producers of materials used in connection with the manufacture of Thin Film Batteries. We believe that we have certain competitive advantages in terms of quality (but acknowledge that we are currently at a disadvantage in terms of capital resources). We intend to actively market our materials to Thin Film Battery producers in the upcoming year in order maintain our strong presence in this market. Currently, SCI is the leading supplier of targets to this market.
 
At present, we have several customers for the materials we produce for Thin Film Batteries. Since we began producing materials for the Thin Film Battery market, we have experienced no problems securing the supplies needed to produce the materials. We do not anticipate supply problems in the near future. However, changes in production methods and advancing technologies could render our current products obsolete and the new production protocols may require supplies that are less available in the marketplace, which may cause a slowing or complete halt to production as well as expanding costs which we may or may not be able to pass on to our customers.
 
In October of 2003, we were awarded a $1.2 million grant from the State of Ohio’s Third Frontier Action Fund. We have teamed with Lithchem Inc. to produce raw materials for the Thin Film Battery sputtering target manufacturing process. The funds were used to procure capital equipment required to commercialize the manufacturing process for target manufacturing. In addition, three manufacturers of Lithium Thin Film Batteries have agreed to participate in the program and will provide testing and manufacturing qualification evaluations of targets produced using the commercial scale processes developed during the grant period. The term of the grant was two years. An extension has been approved and the program is expected to be completed by September 30, 2008. We have received and are using equipment funded by this grant.
 
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Intellectual Property
 
We have received a patent for Fine-Particle Bi-Sr-Ca-Cu-O Having High Phase Purity made by a Chemical Precipitation and Low-Pressure Calcination method from the United States Patent and Trademark Office. We also have received a patent for a new process to join two individual strongly linked super-conductors utilizing a melt processing technique.
 
In the future, we may submit additional patent applications covering various applications, which have been developed by us. Because U.S. patent applications are maintained in secret until patents are issued, and because publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, we may not be the first creator of inventions covered by issued patents or pending patent applications or the first to file patent applications for such inventions. Additionally, other parties may independently develop similar technologies, duplicate our technologies or, if patents are issued to us or rights licensed by us, design around the patented aspects of any technologies we developed or licensed.
 
We rely on a combination of patent and trademark law, license agreements, internal procedures and nondisclosure agreements to protect our intellectual property. Unfortunately, these may be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our products may be produced or sold do not protect our intellectual property rights to the same extent as the laws of the United States.
 
Employees
 
We had 25 full-time employees as of December 31, 2007. Of these employees one held a PhD in Material Science. We have never experienced work stoppage and consider our relations with employees to be good. The employees do not have a bargaining unit.
 
Environmental Matters
 
We handle all materials according to Federal, State and Local environmental regulations and include Material Safety Data Sheets (MSDS) with all shipments to customers.  We maintain a collection of MSDS sheets for all raw materials used in the manufacture of products and maintenance of equipment and insure that all personnel follow the handling instructions contained in the MSDS for each material.  We contract with a reputable fully permitted hazardous waste disposal company to dispose of the small amount of hazardous waste materials generated.
 
Collections and Write-offs
 
We collected receivables in an average of 11 days in 2007. We have occasionally been forced to write-off negligible amount of accounts receivable as uncollectible. We consider credit management critical to our success.
 
Seasonal Trends
 
We have not experienced and do not expect to experience seasonal trends in future business operations.
 
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Additional Information
 
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and file reports, proxy statements and other information with the Securities and Exchange Commission. These reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549 and at the Securities and Exchange Commission’s regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 233 Broadway, New York, New York 10279. You can obtain copies of these materials from the Public Reference Section of the Securities and Exchange Commission upon payment of fees prescribed by the Securities and Exchange Commission. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission’s Web site contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of that site is http://www.sec.gov.
 
We have filed a Registration Statement on Form SB-2 with the Securities and Exchange Commission under the Securities Act with respect to the securities offered in this prospectus. This prospectus, which is filed as part of a Registration Statement, does not contain all of the information set forth in the Registration Statement, some portions of which have been omitted in accordance with the Securities and Exchange Commission’s rules and regulations. Statements made in this prospectus as to the contents of any contract, agreement or other document referred to in this prospectus are not necessarily complete and are qualified in their entirety by reference to each such contract, agreement or other document which is filed as an exhibit to the Registration Statement. The Registration Statement may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission, and copies of such materials can be obtained from the Public Reference Section of the Securities and Exchange Commission at prescribed rates. You may also obtain additional information regarding the Company on our website, located at http://www.sciengineeredmaterials.com .
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with the Financial Statements and Notes contained herein.
 
Except for the historical information contained herein, the matters discussed in this Prospectus include certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our intent, belief, and expectations, such as statements concerning our future profitability and operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that all forward-looking statements contained in this Prospectus and in other statements we make involve risks and uncertainties including, without limitation, the factors set forth under the caption “Risk Factors” and other factors detailed from time to time in our other filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect our business and financial condition and could cause actual results to differ materially from plans and projections. Although we believe the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that any of the forward-looking statements included in this Prospectus will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.
 
Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statements are made or reflect the occurrence of unanticipated events, unless necessary to prevent such statements from becoming misleading. New factors emerge from time to time and it is not possible for us to predict all factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
 
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Overview
 
SCI Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive Components, Inc., an Ohio corporation, was incorporated in 1987. We manufacture ceramic and metal targets for a variety of industrial applications including Photonics, Semiconductor, Thin Film Battery, and, to a lesser extent HTS. Photonics currently represents our largest market for our targets. Thin Film Battery is a developing market where manufacturers of batteries use our targets to produce very small power supplies with small quantities of stored energy. Semiconductor is a developing market.
 
Executive Summary
 
For the year ended December 31, 2007, we had revenues of $10,832,682, which was a 35% increase over 2006.
 
For the year ended December 31, 2007, we recorded net income applicable to common shares of $307,682 compared to $277,083 for 2006. Near the end of the first quarter 2007, the price of a high value raw material used to produce certain products reached a cyclical peak and then declined to approximately one-half of that amount by the end of the second quarter 2007. The price of the raw material had recovered to approximately 65% of the cyclical peak in the second half of 2007. Cost changes for this high value raw material are fully reflected in the final selling price which insulates us from market price fluctuations associated with the raw material. We anticipate that the cost of this high value raw material will continue to be lower for 2008 compared to the first half of 2007. This will continue to have an adverse effect on our total revenues, and, to a lesser extent, gross profit particularly during the first half of 2008 because this high value raw material has a substantially lower gross profit margin compared to our other products.
 
Orders received in 2007 were $10,362,995, compared to $8,841,827 in 2006, an increase of 17%.
 
Results of Operations
 
Critical Accounting Policies
 
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Financial Statements and accompanying notes . Note 2 to the Financial Statements in the Annual Report on Form 10-KSB for the year ended December 31, 2007 describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory allowances, property and equipment depreciable lives, patents and licenses useful lives and assessing changes in which impairment of certain long-lived assets may occur. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Financial Statements. The allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory allowances and our gross margin could be adversely affected. Depreciable and useful lives estimated for property and equipment, licenses and patents are based on initial expectations of the period of time these assets and intangibles will provide benefit to us. Changes in circumstances related to a change in our business, change in technology or other factors could result in these assets becoming impaired, which could adversely affect the value of these assets.
 
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Year 2007 As Compared to Year 2006
 
Revenues
 
Revenues increased by 34.6% in 2007 to $10,832,682 from $8,045,792 in 2006. The revenue growth can be a ttributed primarily to the growth in Photonics products combined with the ongoing purchase of raw materials whose prices have historically experienced periods of significant fluctuation, as well as Thin Film Battery products. We anticipate the cost of a high value raw material will be lower in 2008 compared to the first half of 2007 which will result in lower revenues, particularly during the first half of 2008, compared to 2007.
 
Gross Profit
 
Gross profit in 2007 was $2,057,823 or 19.0% of total revenue as compared to $1,788,244 or 22.2% in 2006. The primary reason for the decrease expressed as a percentage of revenues was due to sales mix of higher value product with lower gross margin.
 
As mentioned earlier, we anticipate the cost of a raw material in 2008 will continue to be less than during the first half of 2007. We expect this to result in a reduction in revenues, and, to a lesser extent, gross profit particularly during the first half of 2008 compared to the first half of 2007 because this high value raw material has a substantially lower gross profit margin compared to our other products.    
 
Selling Expense
 
Selling expense increased 29.1% to $457,689 from $354,609 in 2007. This increase was due to the addition of sales and marketing staff and increased travel. The increased travel was partly due to our attendance at two conferences in September 2007 supporting solar and semiconductor marketing activities.
 
General and Administrative Expense
 
General and administrative expense in 2007 was $884,771 compared to $928,506 in 2006, a decrease of 4.7%. This decrease was due primarily to a reduction in professional fees.
 
Research and Development Expense
 
Research and development expense for 200 7 was $368,971 compared to $212,507 in 2006, an increase of 73.6%. The increase was due to increased staff and continued development efforts associated with applications in Photonic, Solar, Thin Film Battery and Semiconductor markets.
 
Interest Income and Expense
 
Interest income was $64,600 and $43,427 for 2007 and 2006, respectively. This increase was due to increased cash from operations in 2007.
 
Interest expense was $79,788 or 0.7% of revenues in 2007, compared to $15,508, or 0.2% of revenues in 2006. The increase was due to additional capital lease obligations incurred for the purchase of production equipment for increased production capacity.
 
Income Applicable To Common Shares
 
Income applicable to common shares was $ 307,682 and $277,083 for 2007 and 2006, respectively. Net income per common share based on the income applicable to common shares for 2007 and 2006 was $0.09 and $0.08, respectively. The income applicable to common shares includes the net income from operations and the accretion of Series B preferred stock dividends. The net income per common share before dividends on preferred stock was $0.10 and $0.09 for 2007 and 2006, respectively.
 
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Dividends on the Series B preferred stock accrue at 10% annually on the outstanding shares. Accrued dividends on the Series B preferred stock was $24,979 in 2007 and $25,185 in 2006.
 
Basic earnings for 2007 were $0.09 per common share based on 3,461,374 average shares outstanding compared to $0.08 per common share based on 3,427,236 weighted average shares outstanding for 2006.
 
Diluted earnings per common share for 2007 were $0.07 based on 4,217,936 average shares outstanding compared to $0.07 per share based on 3,982,905 weighted average shares outstanding for 2006.
 
The following schedule represents our outstanding common shares during the period of 2008 through 2016 assuming all outstanding stock options and stock warrants are exercised during the year of expiration. If each shareholder exercises his or her options or warrants, it could increase our common shares by 1,209,328 to 4,698,794 by December 31, 2016. Exercise prices for options and warrants range from $1.00 to $4.00 at December 31, 2007. Assuming all such options and warrants are exercised in the year of expiration, the effect on shares outstanding is illustrated as follows:
 
   
Options and
Warrants due

to expire
 
Potential Shares
Outstanding
 
2008
   
68,021
   
3,557,487
 
2009
   
160,418
   
3,717,905
 
2010
   
443,389
   
4,161,294
 
2011
   
70,000
   
4,231,294
 
2012
   
170,000
   
4,401,294
 
2013
   
30,500
   
4,431,794
 
2014
   
90,000
   
4,521,794
 
2015
   
140,000
   
4,661,794
 
2016
   
37,000
   
4,698,794
 

Liquidity and Working Capital
 
At December 31, 2007, working capital was $1,520,218 compared to $1,225,605 at December 31, 2006, an increase of $294,613. Net cash provided by operating activities was approximately $995,000 for the twelve months ended December 31, 2007. Net cash used in operating activities was approximately $76,000 for the twelve months ended December 31, 2006. Significant non-cash items including depreciation, accretion and amortization, stock based compensation expense, inventory reserve on excess and obsolete inventory, and allowance for doubtful accounts were approximately $355,000 and $216,000, for the twelve months ended December 31, 2007 and 2006, respectively. Accounts receivable, inventory, prepaid expenses and other assets decreased approximately $930,000 for the twelve months ended December 31, 2007. This decrease was due to reductions in accounts receivable and inventory as well as the return of a large deposit made in 2006 for equipment that was subsequently leased. Inventory reserves are established for obsolete inventory, excess inventory quantities based on our estimate of net realizable value and for lower-of-cost or market. We believe the inventory reserve, after its assessment of obsolete inventory, at December 31, 2007, of $82,159 will be adequate for excess inventory and a lower of cost-or-market analysis. Accounts receivable, inventory, prepaid expenses and other assets increased approximately $616,000 for the twelve months ended December 31, 2006. Accounts payable, accrued expenses and customer deposits decreased approximately $619,000 during 2007. The decrease was due primarily to a reduction in customer deposits. Accounts payable, accrued expenses and customer deposits increased approximately $21,000 during 2006.
 
28

 
C ash of approximately $288,000 and $334,000 was used for investing activities for the twelve months ended December 31, 2007 and 2006, respectively. The amounts invested were used to purchase machinery and equipment for increased production capacity, new product lines and leasehold improvements for the facility. Proceeds on sale of equipment totaled $19,220 and $100 during 2007 and 2006, respectively.
 
Cash of approximately $173,000 was used for financing activities during the twelve months ended December 31, 2007. Principal payments to third parties for capital lease obligations approximated $178,000, and cash payments for services provided for the registration of common stock were approximately $32,000. Proceeds received from the exercise of common stock options were $9,625. Proceeds received from the exercise of common stock warrants were approximately $27,000. We incurred new capital lease obligations of approximately $1,067,000 for new production equipment during 2007.
 
Cash of approximately $103,000 was used for financing activities during the twelve months ended December 31, 2006. Principal payments to third parties for capital lease obligations approximated $63,000, cash payments for services provided for the registration of common stock were approximately $52,000, and proceeds from the exercise of stock options were $12,000. We incurred new capital lease obligations of approximately $168,000 for a forklift and production equipment.
 
While certain of our major shareholders have advanced funds in the form of subordinated debt, accounts payable and guaranteeing bank debt in the past, there is no commitment by these individuals to continue funding us or guaranteeing bank debt in the future. We will continue to seek new financing or equity financing arrangements. However, we cannot be certain that it will be successful in efforts to raise additional new funds.
 
Inflation
 
We believe that there has not been a significant impact from inflation on our operations during the past three fiscal years.
 
Future Operating Results
 
We plan to place some of our larger purchase commitments for raw materials on an annualized basis because they can be purchased in larger quantities at reduced prices. In general, we attempt to limit inventory price increases by making an annual commitment, and drawing the material either as required, or on a monthly or quarterly basis. Such annual commitments may reach $500,000 in 2008 and greater in 2009 depending on sales volume increases. The terms of payment for such commitments are worked out with the vendor on a case-by-case basis, but in all cases are cancelable at our discretion without penalty.
 
DESCRIPTION OF PROPERTY
 
The Company’s current office and manufacturing facilities are located at 2839 Charter Street, Columbus, Ohio, where it occupies approximately 32,000 square feet. The Company moved its operations into this facility in March 2004. The Company’s lease on the property expires on August 16, 2014.
 
The Company is current on all operating lease liabilities.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
Notes Payable and Capital Lease
 
On October 14, 2005, we entered into an agreement with the Estates of Edward R. Funk and Ingeborg V. Funk. We were indebted to the Estates in the amount of $289,391.92. The Estates agreed to cancel $288,000 of the indebtedness in exchange for 144,000 shares of common stock and warrants to purchase an additional 36,000 shares of common stock at $3.00 per share, which expire October 2010. We transferred $1,391.92 to the Estates in full satisfaction of the remaining amount of the indebtedness.
 
29

 
Convertible Promissory Notes and Stock Purchase Warrants
 
On January 7, 2000, we issued common stock purchase warrants at $2.50 per share for 150,000 shares of common stock related to the subordinated notes payable to Edward R. and Ingeborg V. Funk. The warrants are 100% vested and expire ten years from the date of grant. The Estate of Edward R. Funk and the Estate of Ingeborg V. Funk were both greater than 5% beneficial owners of our Company.
 
On June 30, 2003, we issued a $100,000 convertible promissory note payable to Windcom Investments SA, a greater than 5% beneficial owner of our Company. The interest on the convertible promissory note was determined by the Prime Commercial Rate in effect at Bank One, N.A., Columbus, Ohio. In addition, we issued warrants to purchase 20,333 shares of our common stock to Windcom Investments SA, at $1.00 per share expiring June 2008. The warrants vested according to the following schedule: (1) 8,333 vested on the date of grant; and (2) 12,000 vested at a rate of 333 per month for 32 months, then 336 per month for 4 months. On May 13, 2004, in accordance with the terms of the convertible promissory note, the balance and accrued and unpaid interest owed automatically converted to 43,119 shares of common stock after we raised over $500,000 in private equity financing. As of May 13, 2004, the vested warrants were fixed at 11,633; no additional warrants will vest. In connection with the private equity financing, we also issued 8,623 warrants to Windcom Investments SA to purchase shares of common stock at $2.88 per share. These warrants expire May 2009.
 
On June 30, 2003, we issued warrants to purchase 10,000 shares of common stock at $1.00 per share to the Estate of Edward R. Funk in connection with a lease guarantee. The warrants vested according to the following schedule: (1) 4,600 vested on the date of grant; and (2) 5,400 vested at a rate of 150 per month for 36 months. These warrants expire June 2008.
 
On June 30, 2003, we issued a $166,666.67 convertible promissory note payable to Robert H. Peitz. Mr. Peitz is a greater than 5% beneficial owner of the Company. Mr. Peitz currently serves on our Board of Directors. The Prime Commercial Rate in effect at Bank One, N.A., Columbus, Ohio determined the interest on the convertible promissory note. In addition, we issued warrants to purchase 33,889 shares of our common stock to Mr. Peitz at $1.00 per share, which expire June 2008. The warrants vested according to the following schedule: (1) 13,889 vested on the date of grant; and (2) 20,000 vested at a rate of 556 per month for 32 months, then 552 per month for four months. On May 13, 2004, in accordance with the terms of the convertible promissory note, the balance and accrued and unpaid interest owed on the note automatically converted to 71,873 shares of common stock after we raised over $500,000 in private equity financing. As of May 13, 2004, the vested warrants were fixed at 14,374; no additional warrants will vest. In connection with the 2004 private equity financing, we also issued 19,449 warrants to Mr. Peitz to purchase shares of common stock at $2.88 per share, which expire May 2009.
 
On November 3, 2004, we entered into a loan agreement between the Company, as borrower, and Robert H. Peitz, as lender. Mr. Peitz agreed to loan us up to $200,000 for working capital, to be drawn by us in increments of $50,000. The interest rate was Huntington National Bank’s prime rate plus 2%, which accrued and compounded monthly. The loan was secured by our assets and perfected by the filing of a UCC-1 financing statement. For each $50,000 increment drawn on the loan Mr. Peitz received 5,000 warrants to purchase our common stock, without par value, at a purchase price of $2.50 per share and exercisable until November 1, 2009. The loan was drawn on the following schedule: November 3, 2004, $100,000; January 7, 2005, $50,000; and April 1, 2005, $50,000. The loan balance (principal and accrued interest) was repaid in October 2005 and the UCC-1 financing statement was terminated.
 
On April 14, 2005 we entered into a loan agreement between the Company, as borrower, and Robert H. Peitz, as lender. Mr. Peitz agreed to provide a $200,000 convertible secured loan to us for working capital. The interest rate of 10% accrued and compounded monthly. The loan was drawn on the following schedule: April 14, 2005, $100,000; and May 20, 2005, $100,000. Because we completed equity financing of at least $500,000 during the fourth quarter of 2005, the principal and accrued interest totaling $209,110 automatically converted on the same basis as the new financing to 104,555 shares of common stock ($2.00 per share) and warrants to purchase an aggregate of 26,139 shares of our common stock at a purchase price of $3.00 per share exercisable until October 2010.
 
30

 
Legal Services
 
Curtis A. Loveland is the beneficial owner of greater than 5% of our outstanding common stock. Mr. Loveland is a partner with Porter, Wright, Morris & Arthur LLP, our legal counsel through November of 2006. In November of 2006 we elected to change legal counsel to Carlile Patchen & Murphy LLP. Mr. Loveland’s ownership includes 51,200 shares of common stock, of which 200 shares are held directly in a Keogh account and 51,000 shares which can be acquired by Mr. Loveland under stock options exercisable within 60 days of April 10, 2008, and 283,756 shares beneficially owned by Mr. Loveland as the trustee of generation-skipping irrevocable trusts established by Edward R. and Ingeborg V. Funk.
 
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
Market for Common Stock
 
Our common stock currently trades on the OTC Bulletin Board under the symbol “SCCI.” The following table sets forth for the periods indicated the high and low bid quotations for our common stock.

   
High
 
Low
 
           
Fiscal 2006
         
           
Quarter Ended March 31, 2006
 
$
5.50
 
$
3.50
 
Quarter Ended June 30, 2006
   
4.75
   
3.25
 
Quarter Ended September 30, 2006
   
4.90
   
3.00
 
Quarter Ended December 31, 2006
   
6.15
   
3.10
 
               
Fiscal 2007
             
               
Quarter Ended March 31, 2007
   
7.35
   
5.00
 
Quarter Ended June 30, 2007
   
8.80
   
6.58
 
Quarter Ended September 30, 2007
   
6.90
   
6.10
 
Quarter Ended December 31, 2007
   
7.00
   
5.00
 
               
Fiscal 2008
             
               
Quarter Ended March 31, 2008
   
5.90
   
2.50
 
 
The quotations provided herein may reflect inter-dealer prices without retail mark-up, markdown, or commissions, and may not represent actual transactions.
 
As discussed above, at the present time, our common stock trades on the OTC Bulletin Board. Historically, our common stock was classified as a penny stock. Based on the trading prices during 2007, our common stock was not considered a penny stock for purposes of federal securities laws.
 
If our common stock were to once again fall under the penny stock regulations, it may be difficult to trade the stock because compliance with the regulations can delay and/or preclude certain trading transactions. Broker-dealers may be discouraged from effecting transactions in our stock because of the sales practice and disclosure requirements for penny stock. This could adversely affect the liquidity and/or price of our common stock, and impede the sale of the stock.
 
Holders of Record
 
As of March 31, 2008, there were approximately 450 holders of record of our common stock and 3,501,966 shares outstanding. There were approximately 50 holders of Series B Preferred shares and as of March 31, 2008 there were 24,566 shares outstanding.
 
31

 
EXECUTIVE COMPENSATION
 
The summary compensation table set forth on the following page hereof reflects compensation earned during 2007 to our Principal Executive Officer, and our two most highly compensated officers other than the principal executive officer.
 
[Remainder of page intentionally left blank]
 
32

 
SUMMARY COMPENSATION TABLE

Name and
principal
position
   
Year
   
Salary
   
Bonus
    
Stock
awards
    
Option
awards
(h) 
   
Non-equity
incentive plan
compensation
    
All other
compensation
   
Total
 
PEO
   
2007
 
$
174,038
 
$
5,000
(a)
$
10,001
(a)
$
0
 
$
10,579
(a)
$
0
 
$
199,617
 
Daniel Rooney
                                                 
 
   
2006
   
149,615
   
0
   
0
   
45,395
   
37,477
(b)
 
0
   
232,487
 
                                                   
VP- Sales Photonics
   
2007
   
89,865
   
0
   
5,400
(c)
 
0
   
62,211
(d)
 
0
   
157,476
 
Michael K. Barna
                                                 
 
   
2006
   
86,404
   
0
   
0
   
30,260
   
93,240
(e)
 
0
   
209,904
 
                                                   
VP-Technology
   
2007
   
141,510
   
0
   
0
   
0
   
9,290
(f)
 
0
   
150,800
 
Scott Campbell
                                                 
 
   
2006
   
114,230
   
0
   
0
   
15,132
   
6,000
(g)
 
0
   
135,362
 
 
 
a-
As approved by the Compensation Committee; paid in 2008.
 
b-
Deferred under our incentive compensation plan; paid in 2007.
 
c-
1,000 shares of Company stock awarded based on stock price at December 31, 2007, paid in 2008.
 
d-
$32,599 deferred under our incentive compensation plan; paid in 2008.
 
e-
$34,420 deferred under our incentive compensation plan; paid in 2007.
 
f-
$7,790 deferred under our incentive compensation plan; paid in 2008.
 
g-
$3,000 deferred under our incentive compensation plan; paid in 2007.
 
h-
Options granted under our 2006 Stock Option Plan – Mr. Rooney 15,000 shares; Mr. Barna 10,000 shares; Mr. Campbell 5,000 shares. The shares vest 20% per year beginning June 19, 2007 and the weighted average fair values at date of grant were $3.03 and were estimated using the Black-Scholes option valuation model with the following assumptions: Interest rate of 5%; Volatility of 107.55% and Dividend yield of 0%.

Salaries
 
The salaries of the Named Executive Officers are reviewed on an annual basis. Increases in salary are based on an evaluation of the individual’s performance and level of pay compared to general industry peer group pay levels. Merit increases normally take effect on January 1 st of each year.
 
33

 
Executive Annual Incentive Plan
 
Mr. Rooney received the following incentive compensation award for services during 2007: (i) $7,000 upon the Company attaining a net income of a certain amount (as determined from the audited statements), and (ii) 4% of adjusted net income in excess of a certain amount. Adjusted net income is defined as the 2007 actual net income as it appears on the Company’s audited financial statements plus expenses related to Sarbanes-Oxley and non-cash director compensation.
 
Mr. Barna received the following incentive compensation award for services during 2007: (i) $38,021 for attaining and exceeding quarterly bookings goals, (ii) $5,000 upon the Company attaining a net income of a certain amount (as determined from the audited statements), (iii) $7,500 for exceeding annual booking and gross profit goals and (iv) 2% of adjusted net income in excess of a certain amount. Adjusted net income is defined as the 2007 actual net income as it appears on the Company’s audited financial statements plus expenses related to Sarbanes-Oxley and non-cash director compensation.
 
Mr. Campbell received the following incentive compensation award for services during 2007: (i) $500 for reducing scrap a specified amount, (ii) $500 for the Company meeting specified on-time delivery goals; (iii) $5,000 upon the Company attaining a net income of a certain amount (as determined from the audited statements), (iv) $1,000 for achieving grant income of a specified amount and (iv) 2% of adjusted net income in excess of a certain amount. Adjusted net income is defined as the 2007 actual net income as it appears on the Company’s audited financial statements plus expenses related to Sarbanes-Oxley and non-cash director compensation.
 
Employment Agreement for Principal Executive Officer
 
The Principal Executive Officer, Mr. Daniel Rooney has an employment contract that entitles him to 100% of his compensation for six months following his termination without cause. Following the initial six-month period after his termination, Mr. Rooney is also entitled to receive six months of pay at a rate of 50% of his compensation at the time of his termination.
 
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34

 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

   
OPTION AWARDS
     
STOCK AWARDS
     
Name and
Principal
Position
   
Number of
securities
underlying
unexercised
options (#) –
exercisable
    
Number of
securities
underlying
unexercised
options (#) –
unexercisable
    
Equity
incentive plan
awards:
number of
securities
underlying
unexercised
earned options
(#) 
    
Option
exercise
price
    
Option
expiration
date
    
Number
of shares
or units of
stock that
have not
vested
    
Market
value of
stock
that is
not
vested
    
Total
number of
unearned
shares,
units or
other
rights that
have not
vested
    
Market or
payout value
of unearned
shares,
units or
other rights
that have
not vested
  
PEO
   
100,000
   
0
   
0
 
$
1.55
   
3-1-12
   
0
 
$
0
   
0
 
$
0
 
Daniel Rooney
                                                       
Rooney
   
10,000
   
0
   
0
   
2.60
   
1-21-14
   
0
   
0
   
0
   
0
 
Rooney
   
15,000
   
0
   
0
   
2.40
   
3-8-15
   
0
   
0
   
0
   
0
 
Rooney
   
3,000
   
12,000
(a)
 
0
   
3.25
   
6-19-16
   
0
   
0
   
0
   
0
 
VP- Sales Photonics
   
40,000
   
0
   
0
   
2.85
   
4-28-14
   
0
   
0
   
0
   
0
 
Michael K. Barna
                                                       
Barna
   
10,000
   
0
   
0
   
2.40
   
3-8-15
   
0
   
0
   
0
   
0
 
Barna
   
2,000
   
8,000
(a)
 
0
   
3.25
   
6-19-16
   
0
   
0
   
0
   
0
 
Barna
   
0
   
0
   
0
   
0.00
         
2,000
(b)
 
10,800
   
0
   
0
 
VP-Technology
   
50,000
   
0
   
0
   
1.55
   
7-15-12
   
0
   
0
   
0
   
0
 
Scott Campbell
                                                       
Campbell
   
5,000
   
0
   
0
   
2.60
   
1-21-14
   
0
   
0
   
0
   
0
 
Campbell
   
10,000
   
0
   
0
   
2.40
   
3-8-15
   
0
   
0
   
0
   
0
 
Campbell
   
1,000
   
4,000
(a)
 
0
   
3.25
   
6-19-16
   
0
   
0
   
0
   
0
 
 
a – Options granted June 19, 2006 vest in five equal annual installments on each anniversary of the date   of the grant beginning June 19, 2007.
 
b – Mr. Barna will receive 1,000 shares of Company stock effective December 31, 2008 and December 31, 2009. Mr. Barna must be employed by the Company at the time the shares are paid.
 
35

 
Stock Options
 
At our 2006 Annual Meeting, our shareholders approved our 2006 Stock Incentive Plan (the “2006 Plan”). The purpose of the 2006 Plan was to further the growth and profitability of the Company by providing increased incentives to and encourage share ownership on the part of key employees, officers and directors of, and consultants and advisors who render services to the Company and any future parent or subsidiary of the Company. The 2006 Plan permits the granting of stock options and restricted stock awards (collectively “Awards”) to eligible participants. The maximum number of shares of common stock which may be issued pursuant to the 2006 Plan is 600,000 shares. If an Award expires or is cancelled without having been fully exercised or vested, the unvested or cancelled shares will be available again for grants of Awards. The 2006 Plan is administered by the Company’s Stock Option and Compensation Committee (the “Committee”). All the members of the Committee qualify as “non-employee directors” under Rule 16b-3 of the Securities Exchange Act of 1934 and as “outside directors” under Section 162(m) of the Internal Revenue Code (the “Code”). Pursuant to the 2006 Plan, the Committee has the sole discretion to determine the employees, directors and consultants who may be granted Awards, the terms and conditions of such Awards and to construe and interpret the 2006 Plan. The Committee is also responsible for making adjustments in outstanding Awards, the shares available for Awards, and the numerical limitations for Awards to reflect any transactions such as stock splits or stock dividends. The Committee may delegate its authority to one or more directors or officers; provided, however, that the Committee may not delegate its authority and powers (a) with respect to any Section 16b-3 Persons, or (b) in any way which would jeopardize the Plan’s qualifications under Section 162(n) of the Code or Rule 16b-3. The Board of Directors may amend to terminate the 2006 Plan at any time and for any reason. To the extent required under Rule 16b-3 material amendments to the 2006 Plan must be approved by the shareholders.
 
Eligibility to participate in the 2006 Plan extends to management, key employees, directors and consultants of the Company. The estimated number of eligible participants is approximately 25 persons. The actual number of individuals who may receive options of restrictive stock awards under the 2006 Plan cannot be determined because eligibility for participation of the 2006 Plan is at discretion of the Committee. No participant may receive Awards covering more than 300,000 shares under the 2006 Plan.
 
The Stock Option and Compensation Committee granted stock options to each executive officer in June 2006 under our 2006 Stock Incentive Plan. The executive officers were awarded incentive stock options with an exercise price equal to the fair market value of our common stock on the date of the grant. Accordingly, those stock options will have value only if the market price of the common stock increases after that date. In determining the size of stock option grants, the Committee considers Company performance against the strategic plan and individual performance. The Named Executive Officers were awarded the number of stock options shown in the table above. The stock options vest in five equal annual installments on each anniversary of the date of the grant beginning June 19, 2007. Also shown in the table are the total stock options outstanding and held by each Named Executive Officer.
 
Director Compensation
 
The following Director Compensation table sets forth information regarding compensation paid to our non-employee directors. Directors who are employed by us do not receive any compensation for their board activities.
 
36

 
DIRECTOR COMPENSATION - 2007

Name
 
Fees
earned
or paid
in cash
 
Stock
awards
 
Option
awards
 
Non-equity
incentive plan
compensation
 
Change in
pension value and
non-qualified
deferred
compensation
earnings
 
All other
compensation
 
Total
 
Robert J. Baker, Jr.,
   
$
 5,000
   
$
 10,005
   
$
0
   
$
0
   
$
0
   
$
0
   
$
 15,005
 
Walter J. Doyle, Robert H. Peitz, Edward W. Ungar
                                           

1 – Compensation for Dr. Baker, Jr., Messrs. Doyle, Peitz, and Ungar is identical.
 
2 – Daniel Rooney is the Principal Executive Officer and is Chairman of the Board of Directors. Mr. Rooney does not appear on this table and receives no director compensation.
 
3 – Stock awards of 1,819 shares were granted January 5, 2007 for the 2007 fiscal year.
 
The following discloses the aggregate number of stock option awards outstanding for all directors:
 
Mr. Peitz – Mr. Peitz’ ownership includes 199,162 shares of common stock beneficially owned by Park National Bank (Trustee for the Ingeborg Funk Children’s Trust), of which 43,750 shares of common stock can be acquired under stock purchase warrants exercisable within 60 days of March 31, 2008. Mr. Peitz’ ownership also includes 154,712 shares of common stock, which can be acquired by Mr. Peitz under stock options and purchase warrants exercisable within 60 days of March 31, 2008.
 
Mr. Rooney – 128,000 common shares may be acquired by Mr. Rooney under stock options exercisable within 60 days of March 31, 2008.
 
Mr. Doyle - 24,250 common shares may be acquired by Mr. Doyle under stock options and stock purchase warrants exercisable within 60 days of March 31, 2008.
 
Dr. Baker - 51,000 common shares, which may be acquired by Dr. Baker under stock options exercisable within 60 days of March 31, 2008.
 
Mr. Ungar - 51,000 common shares may be acquired by Mr. Ungar under stock options exercisable within 60 days of March 31, 2008.
 
37

 
Non-Employee Director Reimbursement
 
Non-employee directors are reimbursed for travel and other out-of-pocket expenses connected to Board travel.
 
EQUITY COMPENSATION PLAN INFORMATION
 
The following table sets forth additional information as of December 31, 2007, concerning shares of our common stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements, divided between plans approved by our shareholders and plans or arrangements not submitted to our shareholders for approval. The information includes the number of shares covered by, and the weighted average exercise price of, outstanding options and other rights and the number of shares remaining available for future grants excluding the shares to be issued upon exercise of outstanding options, warrants, and other rights.

   
Number of Securities to
be issued upon
exercise of outstanding
options, warrants and
rights
 
(a)
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
(b)
 
Number of securities
remaining available for
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
 
(c)
 
               
Equity compensation plans approved by security holders (1)
   
584,250
 
$
2.26
   
275,450
 
                     
Equity compensation plans not approved by security holders (2)
   
17,500
 
$
2.88
   
 
                     
Total
   
601,750
 
$
2.28
   
275,450
 
 

 
(1)
Equity compensation plans approved by shareholders include our 1995 Stock Option Plan and our 2006 Plan.
 
(2)
Includes 17,500 stock purchase warrants that can be exercised to purchase 17,500 shares of our common stock, which were issued by us in exchange for consideration in the form of goods and services.
 
LEGAL OPINION
 
The validity of the shares offered hereby has been passed upon for us by Carlile Patchen & Murphy LLP, 366 East Broad Street, Columbus, Ohio 43215.
 
EXPERTS
 
Our financial statements as of December 31, 2006 and 200 7 and for the years then ended, have been included herein and in the Registration Statement in reliance upon the report of Maloney + Novotny LLC (formerly known as Hausser + Taylor LLC), an independent public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
 
38

 
INDEX TO FINANCIAL STATEMENTS

 
Page
Report of Independent Registered Public Accounting Firm
F-2
   
Balance Sheet
F-3
   
Liabilities & Shareholders’ Equity
F-4
   
Statements of Operations
F-5
   
Statements of Shareholders’ Equity
F-6
   
Statements of Cash Flows
F-7
   
Notes to Financial Statements
F-9
 
F-1

 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders
 
SCI Engineered Materials, Inc.
 
Columbus, Ohio
 
We have audited the accompanying balance sheet of SCI Engineered Materials, Inc. as of December 31, 2007, and the related statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SCI Engineered Materials, Inc. as of December 31, 2007, and the results of its operations and its cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ MALONEY + NOVOTNY LLC
North Canton, Ohio
March 5, 2008
 
F-2

 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
SCI ENGINEERED MATERIALS, INC.
BALANCE SHEET
 
DECEMBER 31, 2007
 
ASSETS  
       
CURRENT ASSETS
     
Cash
 
$
1,182,086
 
Accounts receivable
       
Trade, less allowance for doubtful accounts of $24,700
   
219,222
 
Contract
   
65,954
 
Other
   
550
 
Inventories
   
756,999
 
Prepaid expenses
   
21,148
 
Total current assets
   
2,245,959
 
         
PROPERTY AND EQUIPMENT,   AT COST  
       
Machinery and equipment
   
3,386,778
 
Furniture and fixtures
   
74,222
 
Leasehold improvements
   
301,551
 
Construction in progress
   
599,753
 
     
4,362,304
 
Less accumulated depreciation
   
(2,185,277
)
     
2,177,027
 
OTHER ASSETS
       
Deposits
   
18,639
 
Intangibles
   
29,202
 
Total other assets
   
47,841
 
         
TOTAL ASSETS
 
$
4,470,827
 

The accompanying notes are an integral part of these financial statements.
 
F-3


SCI ENGINEERED MATERIALS, INC.
 
BALANCE SHEET
 
DECEMBER 31, 2007
 
LIABILITIES AND SHAREHOLDERS' EQUITY
       
CURRENT LIABILITIES
     
Capital lease obligation, current portion
 
$
259,714
 
Accounts payable
   
160,468
 
Accrued contract expenses
   
47,702
 
Accrued personal property taxes
   
10,216
 
Customer deposits
   
19,483
 
Accrued compensation
   
138,190
 
Accrued expenses and other
   
89,968
 
Total current liabilities
   
725,741
 
         
CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION
   
846,433
 
         
COMMITMENTS AND CONTINGENCIES
   
-
 
         
SHAREHOLDERS' EQUITY
       
Convertible preferred stock, Series B, 10% cumulative, nonvoting no par value, $10 stated value, optional redemption at 103%; 24,566 issued and outstanding
   
375,861
 
Common stock, no par value, authorized 15,000,000 shares; 3,474,338 shares issued and outstanding
   
9,061,378
 
Additional paid-in capital
   
987,840
 
Accumulated deficit
   
(7,526,426
)
     
2,898,653
 
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
4,470,827
 
 
The accompanying notes are an integral part of these financial statements.
 
F-4

 
SCI ENGINEERED MATERIALS, INC.
 
STATEMENTS OF OPERATIONS
 
YEARS ENDED DECEMBER 31, 2007 AND 2006

   
2007
 
2006
 
               
TOTAL REVENUE
 
$
10,832,682
 
$
8,045,792
 
TOTAL COST OF REVENUE
   
8,774,859
   
6,257,548
 
GROSS PROFIT
   
2,057,823
   
1,788,244
 
GENERAL AND ADMINISTRATIVE EXPENSE
   
884,771
   
928,506
 
RESEARCH AND DEVELOPMENT EXPENSE
   
368,971
   
212,507
 
SELLING EXPENSE
   
457,689
   
354,609
 
INCOME FROM OPERATIONS
   
346,392
   
292,622
 
OTHER INCOME (EXPENSE)
             
Interest income
   
64,600
   
43,427
 
Interest expense
   
(79,788
)
 
(15,508
)
Gain on sale of equipment
   
3,287
   
100
 
Miscellaneous, net
   
(1,830
)
 
(18,373
)
     
(13,731
)
 
9,646
 
INCOME BEFORE PROVISION FOR INCOME TAX
   
332,661
   
302,268
 
INCOME TAX EXPENSE
             
NET INCOME
   
332,661
   
302,268
 
DIVIDENDS ON PREFERRED STOCK
   
(24,979
)
 
(25,185
)
INCOME APPLICABLE TO COMMON SHARES
 
$
307,682
 
$
277,083
 
EARNINGS PER SHARE - BASIC AND DILUTED
             
(Note 2)
             
NET INCOME PER COMMON SHARE BEFORE
DIVIDENDS ON PREFERRED STOCK
             
Basic
 
$
0.10
 
$
0.09
 
Diluted
 
$
0.08
 
$
0.08
 
               
NET INCOME PER COMMON SHARE AFTER
DIVIDENDS ON PREFERRED STOCK  
             
Basic
 
$
0.09
 
$
0.08
 
Diluted
 
$
0.07
 
$
0.07
 
               
WEIGHTED AVERAGE SHARES OUTSTANDING
             
Basic
   
3,461,374
   
3,427,236
 
Diluted
   
4,217,936
   
3,982,905
 

The accompanying notes are an integral part of these financial statements.
 
F-5


SCI ENGINEERED MATERIALS, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2007 AND 2006

   
Convertible
Preferred
Stock,
Series B
 
Common
Stock
 
Additional Paid- In
            Capital            
 
Accumulated
Debt
 
Total
 
                       
Balance 12/31/05
 
$
334,961
 
$
9,047,550
 
$
1,010,719
 
$
(8,161,355
)
$
2,231,875
 
                                 
Accretion of cumulative dividends
   
25,185
   
   
(25,185
)
 
   
 
                                 
Stock based compensation expense (Note 2H)
   
   
   
10,052
   
   
10,052
 
                                 
Proceeds from exercise of stock options (Note 5)
   
   
12,000
   
   
   
12,000
 
                                 
Private placement and SB-2 registration
   
   
(51,733
)
 
   
   
(51,733
)
                                 
Net income
   
   
   
   
302,268
   
302,268
 
                                 
Balance 12/31/06
 
$
360,146
 
$
9,007,817
 
$
995,586
 
$
(7,859,087
)
$
2,504,462
 
                                 
Accretion of cumulative dividends
   
24,979
   
   
(24,979
)
 
   
 
                                 
Common stock conversion from preferred stock (Note 5)
   
(9,264
)
 
9,264
   
   
   
 
                                 
Stock based compensation expense (Note 2H)
   
   
   
17,233
   
   
17,233
 
                                 
Proceeds from exercise of stock warrants (Note 8)
   
   
26,909
   
   
   
26,909
 
                                 
Proceeds from exercise of stock options (Note 5)
   
   
9,625
   
   
   
9,625
 
                                 
Private placement and SB-2 registration
   
   
(32,255
)
 
   
   
(32,255
)
                                 
Common stock issued
   
   
40,018
   
   
   
40,018
 
                                 
Net income
   
   
   
   
332,661
   
332,661
 
                                 
Balance 12/31/07
 
$
375,861
 
$
9,061,378
 
$
987,840
 
$
(7,526,426
)
$
2,898,653
 

The accompanying notes are an integral part of these financial statements
 
F-6


SCI ENGINEERED MATERIALS, INC.
 
STATEMENTS OF CASH FLOWS
 
YEARS ENDED DECEMBER 31, 2007 AND 2006

   
2007
 
2006
 
CASH FLOWS FROM OPERATING ACTIVITIES
         
Net income
 
$
332,661
 
$
302,268
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
             
Depreciation and accretion
   
289,096
   
216,664
 
Amortization
   
3,089
   
3,088
 
Stock based compensation
   
57,251
   
10,052
 
Gain on sale of equipment
   
(3,287
)
 
(100
)
Increase (decrease) in inventory reserve
   
6,296
   
(13,399
)
Changes in allowance for doubtful accounts
   
(300
)
 
 
Changes in operating assets and liabilities:
             
(Increase) decrease in assets:
             
Accounts receivable
   
207,280
   
(185,117
)
Inventories
   
426,437
   
(116,087
)
Prepaid expenses
   
26,318
   
(35,718
)
Other assets
   
269,780
   
(279,050
)
Increase (decrease) in liabilities:
             
Accounts payable
   
(136,693
)
 
1,521
 
Accrued expenses and customer deposits
   
(482,586
)
 
19,538
 
Total adjustments
   
662,681
   
(378,608
)
Net cash provided by (used in) operating activities
   
995,342
   
(76,340
)
CASH FLOWS FROM INVESTING ACTIVITIES
             
Proceeds on sale of equipment
   
19,220
   
100
 
Purchases of property and equipment
   
(307,589
)
 
(333,857
)
Net cash used in investing activities
   
(288,369
)
 
(333,757
)
CASH FLOWS FROM FINANCING ACTIVITIES
             
Proceeds from exercise of common stock options
   
9,625
   
12,000
 
Proceeds from exercise of common stock warrants
   
26,909
   
-
 
Payments related to registration of common stock
   
(32,255
)
 
(51,733
)
Principal payments on capital lease obligations
   
(177,660
)
 
(63,045
)
Net cash used in financing activities
   
(173,381
)
 
(102,778
)
The accompanying notes are an integral part of these financial statements.
 
F-7


SCI ENGINEERED MATERIALS, INC.
 
STATEMENTS OF CASH FLOW (CONTINUED)
 
YEARS ENDED DECEMBER 31, 2007 AND 2006
 
   
2007
 
2006
 
               
NET INCREASE (DECREASE) IN CASH
 
$
533,592
 
$
(512,875
)
               
CASH – Beginning of period
   
648,494
   
1,161,369
 
               
CASH – End of period
 
$
1,182,086
 
$
648,494
 
               
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
             
Cash paid during the years for:
             
Interest, net
 
$
79,788
 
$
15,508
 
Income taxes
   
   
 
               
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES
             
Property and equipment purchased by capital lease
 
$
1,067,315
 
$
168,208
 
Property and equipment accrued asset retirement obligation increase
   
3,312
   
3,312
 
               
SUPPLEMENTAL DISCLOSURES OF NONCASH
OPERATING ACTIVITIES
             
Stock based compensation expense
 
$
57,251
 
$
10,052
 

The accompanying notes are an integral part of these financial statements.
 
F-8

 
SCI ENGINEERED MATERIALS, INC.
 
NOTES TO FINANCIAL STATEMENTS
 
Note 1.
Business Organization and Purpose
 
SCI Engineered Materials, Inc. (“SCI” or the “Company”), formerly Superconductive Components, Inc., an Ohio corporation, was incorporated in 1987. The Company manufactures ceramic and metal sputtering targets for a variety of industrial applications including Photonics, Semiconductor, Thin Film Battery, and, to a lesser extent High Temperature Superconductive (“HTS”) materials. Photonics currently represents the Company’s largest market for its targets. Thin Film Battery is a developing market where manufacturers of batteries use the Company’s targets to produce very small power supplies with small quantities of stored energy. Semiconductor is a developing market.
 
Note 2.
Summary of Significant Accounting Policies
 
A.
Inventories - Inventories are stated at the lower of cost or market on an acquired or internally produced lot basis, and consist of raw materials, work-in-process and finished goods. Cost includes material, labor, freight and applied overhead. Inventory reserves are established for obsolete inventory and excess inventory quantities based on management’s estimate of net realizable value. The inventory reserve increased $6,296 during 2007 and decreased $13,399 during 2006.

The Company enters into cancelable purchase commitment arrangements with some suppliers. Estimated purchase commitments to these suppliers approximate $122,000 at December 31, 2007. The Company can cancel these commitments at the Company’s discretion without penalty.
 
 
B.
 
Property and Equipment - Property and equipment are carried at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the assets for financial reporting purposes and allowable accelerated methods for tax purposes. Useful lives range from ten years on certain furniture and fixtures and leasehold improvements to three years on computer equipment. Depreciation expense totaled $285,784 and $210,360 for the years ended December 31, 2007 and 2006, respectively. Expenditures for renewals and betterments are capitalized and expenditures for repairs and maintenance are charged to operations as incurred. Construction in process consists primarily of a piece of equipment that was placed in service in January, 2008 at a total cost of approximately $550,000.
 
     
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. There have been no such impairment adjustments.
 
 
C.
 
Research and Development - Research and development costs are expensed as incurred. Research and development expenses for the years ended December 31, 2007 and 2006 were $368,971 and $212,507, respectively. The increase was due to an increase in staff and continued development of efforts associated with applications in Photonic, Solar, Thin Film Battery and Semiconductor markets.
 
F-9


SCI ENGINEERED MATERIALS, INC.
 
NOTES TO FINANCIAL STATEMENTS
 
Note 2.
Summary of Significant Accounting Policies (Continued)
 
 
D.
Equipment - In 2004, the Company received funds of $517,935 from the Ohio Department of Development’s Third Frontier Action Fund (TFAF) for the purchase of equipment related to the grant’s purpose. In a separate contract with the Department of Energy the Company received $27,500 for the purchase of equipment related to the contract’s purpose. The Company has elected to record the funds disbursed as a contra asset; therefore, the assets are not reflected in the Company’s financial statements. As assets were purchased, the liability initially created when the cash was received was reduced with no revenue recognized or fixed asset recorded on the balance sheet. As of December 31, 2007, the Company had disbursed the entire amount received. The grant and contract both provide that as long as the Company performs in compliance with the grant/contract, the Company retains the rights to the equipment. Management states that the Company will be in compliance with the requirements and, therefore, will retain the equipment at the end of the grant/contract.
 
 
E.
Licenses - The Company has secured licenses to produce various superconductive materials for periods up to the expiration of the applicable patents. The license fees, included in “Other Assets” on the balance sheet, are being amortized over the expected life of the agreement or applicable patent, which is seventeen years. Cost and accumulated amortization of licenses at December 31, 2007 were $21,000 and $15,230, respectively. Amortization expense was $1,259 for the years ended December 31, 2007 and 2006. Amortization expense is estimated to be $1,259 for each of the next four years and $734 in 2012.
 
 
F.
Patent - The Company has secured patents for manufacturing processes used in its operations. Costs incurred to secure the patents have been capitalized, included in “Other Assets” on the balance sheet, and are being amortized over the life of the patents. Cost and accumulated amortization of the patents at December 31, 2007 were $37,869 and $14,437 respectively. Amortization expense was $1,830 for the years ended December 31, 2007 and December 31, 2006. Amortization expense is estimated to be at least $1,830 for each of the next five years.
 
G.
Income Taxes - Income taxes are provided for by utilizing the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities using presently enacted tax rates. Deferred tax assets are recognized for net operating loss carry forwards, reduced by a valuation allowance which is established when “it is more likely than not” that some portion or all of the deferred tax assets will not be recognized.
 
F-10

 
SCI ENGINEERED MATERIALS, INC.
 
NOTES TO FINANCIAL STATEMENTS
 
Note 2.
Summary of Significant Accounting Policies (Continued)
 
H.
Stock Based Compensation - In December 2004, the FASB issued SFAS 123 (Revised), “Shared Based Payment” (SFAS 123R). SFAS 123R replaced SFAS 123, and superseded APB Opinion No. 25. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R and related interpretations using the modified-prospective transition method. Under this method, compensation cost recognized includes (a) compensation cost for all stock-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all stock-based awards granted on or subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
 
For the twelve months ended December 31, 2007 and 2006, there was $57,251 and $10,052 respectively, of stock based compensation cost included in the determination of net income as reported. 2007 expense includes $40,018 in common stock issued to directors.
 
I.
Net Income Per Common Share - Net income per common share amounts are based on the weighted average number of shares outstanding.
 
 
J
.
Statements of Cash Flows - For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with maturity of three months or less to be cash. No such investments were purchased.
 
 
K.
 
Concentrations of Credit Risk - The Company’s cash balances, which are at times in excess of federally insured levels, are maintained at a large regional bank and a global investment banking group, and are continually monitored to minimize the risk of loss. The Company grants credit to most customers, who are varied in terms of size, geographic location and financial strength. Customer balances are continually monitored to minimize the risk of loss.
 
     
The Company had four major customers in 2007 and 2006, which accounted for revenue of approximately $9,100,000 and $6,400,000, respectively. A portion of the revenue was attributable to an increase in a commodity raw material which can fluctuate significantly. These customers totaled approximately $120,000 of the trade accounts receivable at December 31, 2007. The largest customer represented over 50% of total revenues in 2007. As previously reported on Form 8-K dated February 21, 2008, this customer notified the Company that its orders for 2008 will be significantly less than 2007 due to improved utilization of targets in its manufacturing process coupled with lower planned inventory levels compared to 2007. The impact from orders that will not be received in 2008 represented approximately $1.5 million of revenue in 2007.
 
F-11

 
SCI ENGINEERED MATERIALS, INC.
 
NOTES TO FINANCIAL STATEMENTS
 
Note 2.
Summary of Significant Accounting Policies (Continued)
 
 
L.
 
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
M.
Fair Value - The estimated fair value of amounts reported in the financial statements have been determined using available market information and valuation methodologies, as applicable (see Note 10).
 
N.
Revenue Recognition - Revenue from product sales is recognized upon shipment to customers. Provisions for discounts and rework costs for returns are established when products are shipped based on historical experience. Customer deposits represent cash received in advance of revenue earned. Revenue from contract research provided for third parties is recognized on the percentage of completion method.  
 
O.
Accounts Receivable - The Company extends unsecured credit to customers under normal trade agreements, which require payment within 30 days. Accounts greater than 90 days past due, which amounted to $0 as of December 31, 2007 and 2006, are considered delinquent. The Company does not charge interest on delinquent trade accounts receivable. Accounts greater than one year past due are placed on non-accrual status. Unless specified by the customer, payments are applied to the oldest unpaid invoice. Accounts receivable are presented at the amount billed.
 
Management estimates an allowance for doubtful accounts, which was $24,700 and $25,000 as of December 31, 2007 and 2006. The estimate is based upon management’s review of delinquent accounts and an assessment of the Company’s historical evidence of collections. Bad debt expense was $0 for the years ended December 31, 2007 and 2006. Specific accounts are charged directly to the reserve when management obtains evidence of a customer’s insolvency or otherwise determines that the account is uncollectible. Charge-offs of specific accounts for the years ended December 31, 2007 and 2006 totaled $300 and $0 respectively.
 
P.
Intangible Assets - The Company accounts for Intangible Assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires certain intangible assets to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards required. There were no impairment adjustments for the years ended December 31, 2007 and 2006.
 
F-12

 
SCI ENGINEERED MATERIALS, INC.
 
NOTES TO FINANCIAL STATEMENTS
 
Note 2.
Summary of Significant Accounting Policies (Continued)
 
Q.
Recently Issued Accounting Standards -
 
Fair Value Measurements   - In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, effective for the Company beginning on January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement establishes a fair value hierarchy that distinguishes between valuations obtained from sources independent of the entity and those from the entity’s own unobservable inputs that are not corroborated by observable market data. SFAS 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings or changes in net assets for the period. The Company is currently assessing the impact of this guidance on its financial statements.
 
Accounting for Uncertainty in Income Taxes - In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 became effective for the Company beginning in 2007. Although the Company will continue to evaluate the application of FIN 48, management does not currently believe adoption will have a material impact on the Company’s financial position and results of operations.
 
Fair Value Option for Financial Assets and Financial Liabilities   - In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities”, effective for the Company beginning on January 1, 2008. This Statement provides entities with an option to report selected financial assets and liabilities at fair value, with the objective to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The Company is currently assessing the impact of this guidance on its financial statements.
 
R.
Reclassification - Certain amounts in the prior year financial statements pertaining to contract research, inventory and customer deposits have been reclassified to conform to the current year presentation.
 
F-13


SCI ENGINEERED MATERIALS, INC.
 
NOTES TO FINANCIAL STATEMENTS
 
Note 3.
Inventories
 
Inventories consist of the following at December 31, 2007:

Raw materials
 
$
392,937
 
Work-in-process
   
205,528
 
Finished goods
   
240,693
 
     
839,158
 
   
82,159
 
   
$
756,999
 
 
Note 4.
 
Lease Obligations
 
   
Operating
 
   
The Company leases its facilities and certain office equipment under agreements classified as operating leases expiring through 2014. Rent expense which includes various monthly rentals for the years ended December 31, 2007 and 2006, totaled $145,514 and $158,032, respectively. Future minimum lease payments at December 31, 2007 are as follows:
 
2008
 
$
101,876
 
2009
   
113,578
 
2010
   
109,146
 
2011
   
109,146
 
2012
   
108,484
 
2013 and beyond
   
176,433
 
   
$
718,663
 

F-14


SCI ENGINEERED MATERIALS, INC.
 
NOTES TO FINANCIAL STATEMENTS
 
Note 4.
 
Lease Obligations (continued)
 
   
Capital
 
     
The Company also leases certain equipment under capital leases. The future minimum lease payments, by year, with the present value of such payments, as of December 31, 2007 is as follows:
 
2008
 
$
348,011
 
2009
   
337,276
 
2010
   
284,349
 
2011
   
250,893
 
2012
   
90,354
 
Total minimum lease payments
   
1,310,883
 
Less amount representing interest
   
204,736
 
Present value of minimum lease payments
   
1,106,147
 
Less current portion
   
259,714
 
Long-term capital lease obligations
 
$
846,433
 
 
The equipment under capital lease at December 31, 2007 is included in the accompanying balance sheet under the following captions:
 
Machinery and equipment
 
$
1,342,273
 
Less accumulated depreciation
   
154,813
 
Net book value
 
$
1,187,460
 
 
These assets are amortized over three to seven years using the straight-line method and amortization is included in depreciation expense.
 
Note 5.
Common and Preferred Stock
 
Common Stock
 
6,000 stock options were exercised during 2007 resulting in proceeds of $9,625. The exercise price for these options ranged from $1.50 to $2.125. Proceeds from 26,909 warrants exercised were $26,909. 7,000 stock options were exercised during 2006 resulting in proceeds of $12,000. The exercise price for these options ranged from $1.00 to $2.00.
 
F-15

 
SCI ENGINEERED MATERIALS, INC.
 
NOTES TO FINANCIAL STATEMENTS
 
Note 5.
Common and Preferred Stock (continued)
 
Preferred Stock
 
Shares of preferred stock authorized and outstanding at December 31, 2007 are as follows:

   
Shares
 
Shares
 
   
Authorized
 
Outstanding
 
Cumulative Preferred Stock
   
10,000
   
-
 
               
Voting Preferred Stock
   
125,000
   
-